Bankers across the country are huddling in board rooms to discuss a problem they thought had been tackled years ago. But the financial rot in some state electricity boards (SEBs) has only worsened since banks restructured loans to these entities under the financial restructuring proposal (FRP) in September 2012.
Less than three years later, as the moratorium on principal repayments included in the restructuring packages, comes to an end, bankers are fearing defaults from at least some of these SEBs. Some states such as Rajasthan are already seeking fresh restructuring of more than Rs.50,000 crore in short-term liabilities.
What's making bankers more restless this time around is the seemingly hands-off approach taken by the central government and the banking regulator so far. Both seem to be putting the onus on states to resolve the issue through a combination of tariff hikes and cutting down of transmission losses—neither of which will provide immediate respite to SEBs or their bankers.
"When the FRP was being signed, all SEBs had agreed to raise tariffs. But in the three years after that, not many have been able to live up to the promise. Moreover, their transmission losses have largely remained at the same level. Considering the level of exposures that bankers have to the sector, it is a matter of immediate concern," a senior executive of a public sector bank that has significant exposures to state utilities, said on conditions of anonymity.
On Tuesday, The Economic Times reported that State Bank of India chairperson Arundhati Bhattacharya recently met senior officials of the finance and power ministries to raise concerns over the potential rise in bad loans emerging from the power sector, specifically from the SEBs.
The concerns raised were industry-wide and not specific to SBI.
According to analyst estimates, the exposure of the banking sector alone—not including non-banking financial companies—may be around Rs.2 trillion today. This is nearly double of the Rs.1.13 trillion exposure estimated by ICICIdirect.com Research in a report in October 2012. Mint could not independently verify this data since RBI and banks have not publicly released it.
Rajasthan SEB alone had short-term liabilities worth more than Rs.50,000 crore as of March, according to a document put out by the state government in June.
"Since bank exposure to the sector is so high, we cannot afford to let them (SEBs) become NPAs. Not only will our balance sheets suffer, an entire state's electricity needs will also go for a toss, as banks will be forced to initiate recovery measures, which may even lead to asset sales," said a second public sector banker on conditions of anonymity as he is not authorized to speak to reporters.
The banker added that while some SEBs have sought a reduction in interest rates, bankers will not be able to accept these requests as it will qualify as a second restructuring and turn the account into a bad loan according to RBI rules.
Interest rates on loans to SEBs range between 13% and 14%, said the banker.
In its half-yearly financial stability report, RBI had pointed out that banks had already restructured Rs.53,000 crore worth of debt of distribution utilities under the FRP.
RBI in its report had said that state governments may not be able to repay these loans considering inadequate fiscal space. RBI noted that these loans had a very high chance of turning into non-performing assets.
Analysts say that the situation is particularly worrying since the last restructuring package failed to do much good.
"The bankers were much less worried back in 2012 since the central government had backed the restructuring plan. But now that the FRP has more or less fizzled out, they are getting more desperate for a solution to the SEB problem," said a banking analyst at a domestic brokerage, declining to be identified.
To be sure, the exposure across different banks varies. While larger state-owned banks like SBI have relatively limited exposure, some of the mid-sized banks have higher exposure.
Bangalore-based Vijaya Bank had SEB exposure worth Rs.5,790 crore as on 31 March 2012, according to a report by brokerage ICICIdirect.com. This was nearly 10% of the bank's outstanding advances.
Dena Bank had loaned Rs.4,536 crore to SEBs at the same time, which represented 7.9% of its overall advances.
Central Bank of India, which is the lead lender to a distribution utility in Rajasthan, had overall SEB exposure worth more than Rs.12,000 crore, which was 8% of the bank's total advances during that period.
Since these banks already have a large stock of bad loans and a comparatively weaker capital adequacy ratio, they could face considerable pressure if SEB loans turn bad.
Some believe that the fresh restructuring proposal from Rajasthan SEB should be used to come up with a more viable solution.
In a Mint column titled Rejuvenating Indian Banks on Tuesday, former RBI deputy governor Usha Thorat pointed out that Rajasthan's request could be taken as a basket case by ensuring that a viable package is drawn up, which could include equity infusion—including cash or bonds—by the state government.
"Banks should also seek enhanced security coverage (as also asset sales by producers) for their exposures to power producers. This will send the right signals to the markets that the government means business and that there are no easy bailouts," Thorat said in her column.