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• Freeing up of capital, though not be significant: Direct exposures to state governments attract 0% risk weight as against 20% for state government guaranteed exposures and 100% for unrated exposures. As these exposures (currently attracting risk weight of 20% largely) will be converted to state government bonds, banks capital adequacy will improve to some extent; in ICRA’s estimate total capital relief for PSBs could be in the range of Rs 40-55 billion. • Impact on PFC / REC Extent of credit of PFC/REC which could eligible under this programme is estimated at 11-14% of their combined credit, thereby reducing their portfolio vulnerability. As in the case with banks, sell down credit converted to state government bonds, could reduce their credit growth to some extent or incase retained on the balance would bring down NIMs. Implications for State Government Finances • The total debt outstanding of the DISCOMs in India is pegged at Rs. 4.30 trillion at the end of 2014-15, with interest rates of upto 14-15%. States participating in the UDAY scheme shall take over 75% of DISCOM debt outstanding as on 30 September 2015 over two years: 50% in 2015-16 and 25% in 2016-17, by issuing non-SLR State Development Loans (SDL) in the market or directly to the existing Lenders holding the DISCOM debt to the appropriate extent. The balance 25% of the debt not taken over by the State shall be restructured, but may not necessarily need to be guaranteed by the State Governments. • Fiscal Indicators: The GoI has indicated that it will exclude the debt taken over by the States as per this scheme in the calculation of fiscal deficit of respective States in 2015-16 and 2016-17. Accordingly, the compliance of the participating States with the target set by the Fourteenth Finance Commission (FFC) of curtailing fiscal deficit below 3.0% of GSDP would not be impacted, to the extent of the debt taken over. Therefore, there should not be any impact on the fiscal space for funding other programmes in these two years. The fiscal deficits of Andhra Pradesh (AP), Telangana, Haryana, Uttar Pradesh, Rajasthan and Tamil Nadu, which ICRA estimates would account for 70% of the DISCOM debt of Rs. 4.3 trillion outstanding at end 2014- 15, range between 2.9% and 3.5% of their GSDP according to their Budget Estimates (BE) for 2015-16 . • Servicing of interest however, as and when it falls due on the debt taken over by the State Governments, would bloat their interest payments to some extent, unfavourably impact their revenue and fiscal balances and consequently add to their borrowings. This would impact the performance of the States on the fiscal deficit target as well as the implicit targets set by the FFC, i.e. restricting interest payments at or below 10% of their revenue receipts, curtailing debt below 25% of their GSDP and maintaining a balanced or surplus revenue account. From 2017-18, a portion of the DISCOM losses, if any, would also be taken over by the participating states, which would have an impact on the fiscal deficit from that year onwards, unless the financial performance of the underlying DISCOMs improve in the meanwhile. • Borrowing Limit and Liquidity: Assuming that the DISCOM debt taken over by the State Governments will also be excluded from the annual borrowing limit for 2015-16 and 2016-17, there would be no impact on the States’ existing borrowing plans. The DISCOM debt is to be funded by issuing non-SLR SDL in the market or directly to the existing Lenders holding the DISCOM debt to the appropriate extent. If all States participate in the Scheme, the amount of debt that would be issued by the States could be as large as Rs. 2.15 trillion in 2015-16 and Rs. 1.08 trillion in 2016-17, which is substantial in relation to the gross SDL of Rs. 2.4 trillion raised by the 29 State Governments in 2014-15. • Until now, all SDL issued to market participants by State Governments are eligible for SLR. The appetite for market participants to invest in non-SLR SDL is unclear, given the lack of a track record for such instruments. However, the pool of investors for SDL has recently been broadened. In its Fourth Bi-Monthly Monetary Policy review, the Reserve Bank of India (RBI) announced the creation of POWER SECTOR a separate limit for investment in SDLs by foreign portfolio investors (FPIs), to be increased in a calibrated manner to reach 2% of the outstanding stock by March 2018 (expected additional investment of Rs 500.0 billion by March 2018). In the first phase, FPI investment of Rs. 35.0 billion in SDL has been permitted by the RBI as of October 12, 2015, which has already been fully utilised. This limit will be revised to Rs. 70.0 billion on January 1, 2016. In our view, FPI investment in SDLs is likely to augment liquidity in this asset class. However, the estimated investment permitted to be made by FPIs by March 2018 is small in relation to the total debt of Rs. 3.2 trillion (75% of Rs. 4.3 trillion) that would need to be taken over by the States, if all States participate in the UDAY scheme. In ICRA’s view therefore, it is likely that States may end up issuing a substantial portion of the non-SLR SDL directly to the existing lenders. • The modest and phased step-up in investment limits for FPIs is unlikely to result in a broad-based reduction in SDL yields. ICRA is optimistic that the permission to FPIs to invest in SDL will bring muchneeded market scrutiny on States’ fiscal health and usher in an era in which the cost of market borrowings for a State will be consistent with its credit profile. • Regardless, interest rates on non-SLR SDL (whether issued in the market or to the existing Lenders) are likely to exceed those on the regular SDL, as the lenders may demand a higher risk premium for the former. However, the interest rates on non-SLR SDL are likely to be lower than the existing interest rates on DISCOMs’ debt, resulting in net interest saving on a consolidated basis (for the States and their DISCOMs). At present, the net borrowing limit for State Governments is fixed by the GoI at 3.0% of GSDP. If the annual borrowing limit for State Governments continues to be set by the GoI on a gross basis, i.e. after adding back principal repayments due in any given year, it will allow the States to redeem the bonds at the time of maturity without exerting pressure on liquidity (Source: Website of Press Information Bureau & Ministry of New and Renewable Energy, ICRA (http://www.icra.in/) & PFC, ICICIdirect.com Research) 77 energetica INDIA · ENE | FEB16


energetica-india-55
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