The committee on the financial viability of state power distribution companies set up by the PM is working on a proposal to extend the fiscal responsibility and budget management (FRBM) targets for states to enable them to take over more short-term liabilities of discoms and issue bonds against it, thus bringing down the discoms’ interest cost by 2-3 percentage points.

This is despite the Reserve Bank of India flagging the worrying trend of growth in outstanding liabilities for the states in the last fiscal and slippages of fiscal front in many states in 2014-15.

“The central point of discussion has been about extending the limits of our expenditure under FRBM. This will enable states to arrange for more loans, apart from taking over more debt from SEBs and issue bonds against it,” a senior SEB official from a state told FE on the condition of anonymity. He added that discussions were not ‘crystallised’ into an actionable decision currently, and would be adopted only if all stakeholders were on board.

Power minister Piyush Goyal on Monday apprised PM Narendra Modi of the current status of discussions being held between the Centre and states under the aegis of the committee, set up in July.

The central government has been exploring ways to make states buy more power from producers that have had to suffer stranded assets due to lack of demand. To bring down cost of debt for SEBs, which would provide headroom for them to procure power, the stakeholders have been mulling over extending the FRBM limit.

Going by RBI’s analysis on states’ outstanding liabilities, extending FRBM limits would come with its own pitfalls.

“As the states participating in the FRP would have to progressively take over the entire bond liabilities of discoms by FY18, their liabilities would increase in the coming years. Further, under FRP, short-term liabilities amounting to Rs 51,200 crore have been restructured by lenders that are backed by state government guarantees. This would increase the contingent liabilities of participating states,” the RBI had said in its annual appraisal of states’ finances in May.

Last week, on Saturday, Goyal held a meeting with the chief secretaries of states that are part of the financial restructuring plan (FRP) devised in 2012 to help states overcome mounting debt. The outstanding debt of SEBs under FRP is estimated to be nearly Rs 3 lakh crore at the end of FY15.

Apart from extension of FRBM, states have also proposed that the Centre should provide them capital reimbursement support as soon as they took over the bonds issued by discoms “sans any conditionalities”. Seeking lower interest rates on fresh bank loans to be taken by discoms, the states said 2013-14 should be taken as the first year of FRP (rather than 2012-13 as now), adding that “at least 50% of operational losses should be funded by banks (until) FY2018-19”.

However, the power minister has ruled out any new bailout package or extension of the current restructuring plan which is slated to lapse next year.