Opinion: SEBs must pay for their sins, not banks

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Published: October 7, 2015 6:55:49 PM

Rajasthan’s state electricity board (SEB) had accumulated losses of close to Rs 80,000 crore at the end of March 2015 and it owed banks around Rs 73,000 crore.

State Electricity boardsThe solution being discussed of asking the state governments to take over the debt of their respective SEBs and issuing bonds – which will be subscribed to by banks – is taking the easy way out and could mean a big hit for PSU banks. (Reuters)

Shobhana SubramanianRajasthan’s state electricity board (SEB) had accumulated losses of close to Rs 80,000 crore at the end of March 2015 and it owed banks around Rs 73,000 crore. For perspective, the combined profits of 25 public sector banks in FY15 were less than half that sum at about Rs 37,000 crore.

While Rajasthan has among the worst-performing SEBs in the country there are many who are just marginally better ; Uttar Pradesh’s losses in March, 2014 were Rs 60,000 crore and Tamil Nadu’s Rs 53,000 crore. That’s the state of affairs at SEBs and unless the power ministry is comes up with a good solution to deal with their debt, banks could end up losing a lot of money, mostly the taxpayer’s money.

Power Minister Piyush Goyal says his team is working on it but the fact is the NDA government is unlikely to be able to take a tough stance because it has not even been able to persuade BJP-ruled states like Rajasthan to raise tariffs. Indeed, Goyal believes the crisis can be resolved merely by lowering technical and commercial losses; any talk of tariff hikes is brushed aside.

The solution being discussed of asking the state governments to take over the debt of their respective SEBs and issuing bonds – which will be subscribed to by banks – is taking the easy way out and could mean a big hit for PSU banks.

That’s because loans are typically priced at 12-13% whereas bonds might be issued at 8 or 9% which is a hit of 300-400 basis points on the yield. That apart, lenders will be saddled with long-tenure bonds which they might have to hold till maturity in the absence of buyers. The state governments and their SEBs – who are in a sense wilful defaulters – must be made to feel the pain. And that can happen if the central government immediately starts paying off lenders from the states’ share of revenues – if Rajasthan, for instance is set get say Rs 10,000 crore this year as it share of taxes, at least half of this should go to the banks. That’s the only way the state governments will become disciplined and be forced to raise tariffs. Else, they will continue to enjoy a free ride. SEBs owe banks, mostly state-owned banks, some Rs two lakh crore, which is roughly 4% of their loan portfolios. In 2012, around Rs 55,000 crore was restructured; essentially the SEBs were given easier repayment terms in return for a commitment tariffs would be raised. All that has happened is that the losses have risen. For instance UP’s accumulated losses jumped from Rs 43,378 crore in FY13 to Rs  60,101 crore in FY 14.

To be sure, it’s the UPA government that is to blame for allowing banks to become so vulnerable – the restructuring should never have been allowed and the Reserve Bank of India (RBI) should never have allowed banks to classify the assets as standard instead of non-performing. But now the NDA government must put an end to these mindless losses, it must stop pampering the states.

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