Union Power Minister Piyush Goyal told Mint newspaper that the financial impact of the UDAY bonds on the Centre is \u2018zero\u2019. But the fact is that several state-owned banks are taking a big haircut immediately. The loss in net interest income, if one assumes Rs three lakh crore of loans will be converted, could be close to Rs 8,000 crore, annually--the average lending rate is 12% while the coupon on the bonds is 8.5%- and that\u2019s a conservative estimate. Assuming the tenure of the loans is even ten years, that\u2019s a hit of nearly Rs 80,000 crore. Given the government owns a majority stake in these lenders and is hard pressed to even infuse Rs 25,000 crore of capital, can this be called a zero impact? The minister is overstating the case by passing off a mere re-arrangement of finances\u2014and that too at unfavourable terms to one party\u2014as reform. All that has happened is that the banks have been presented with a fait accomli to accept a conversion of their loans into bonds. The alternative would have been lose the money altogether. The unfortunate truth is that when lenders are owed large sums-the total outstandings of discoms is over Rs four lakh crore--and their owners are not willing to bat for them they have little choice but to accept the terms of the borrower or live with a default. That they have no say in the coupon rate\u2014only 8.4% for the Rajasthan bonds irrespective of the tenor\u2014is in itself shocking. It is true that since the bonds will be issued by state governments they carry a lower risk and to that extent some capital will be freed up. But the bonds yield less than those of sovereign bonds when in fact it should be the reverse because these bonds will not qualify for SLR status. Without an SLR tag money market players like mutual funds or insurance companies will not touch them. The Reserve Bank of India (RBI) may have allowed banks to hold these to maturity shielding them from mark to market losses. But would be little consolation to banks who want these off their books as soon as possible especially since there is a moratorium on principle payments. The question is why state governments --who the minister calles the architects of the scheme--could not have been asked to take a haircut? After all they have proved to be inefficient---accumulated losses of discoms at the end of FY14 were Rs three lakh crore with Rajasthan topping the list with Rs 80,000 crore and Uttar Pradesh following with Rs 70,700 crore. The average ATC losses are 22%, across the country, while for Uttar Pradesh these are 32.36%. The states also behaved irresponsibly by not raising tariffs or not funding losses from their own budgets but intead piling on the loans from the banks. So why could banks not have been repaid some share of their dues--at least 15 to 20%? The states should have been asked to pay off some part of their dues and subsequently issue bonds if they needed to. That way the coupon on the bonds would have been benchmarked to the market not rigged the way they have been. This is no reform.