FRP for State Discoms – Not So Structured Results: Ind-Ra Market

The financial restructuring of state distribution companies’ (discoms) debt has led to the postponement of financial stress situation rather than providing a permanent solution, says India Rating and Research (Ind-Ra). The root causes of revenue gap - transmission losses and insufficient tariffs - have not been addressed fully in the last three years, which may result in the bank debt to discoms turning into non-performing assets.

The Reserve Bank of India has also cautioned in its Financial Stability Report 2015 about the high probability of restructured discom debt being classified as non-performing assets. The financial restructuring package (FRP) has deferred the problems rather than resolving them; this is in view of the absence of requisite tariff hikes, power purchase cost rationalisation (lowering of short-term power purchase by 5%-10% from FY14), a reduction in cross-subsidy as well as in aggregate technical & commercial losses, the liquidation of regulatory assets, a certain degree of competition, greater regulatory autonomy as well as of timely/upfront receipt/payment of subsidy from state governments.

This poses a systemic risk, as the financial position of state discoms which had undertaken FRP in October 2012 has not improved. Ind-Ra estimates the outstanding debt of the seven discoms (Rajasthan, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Andhra Pradesh), which had their debt restructured, to have grown by 23.3% to around INR2,754bn in FYE15 over FY13.

Under FRP, discoms in Rajasthan had restructured debt of about INR200bn. The Rajasthan state government during July 2015 floated a request for proposal inviting bids for the preparation of a debt restructuring package for the state discoms, indicating liquidity stress.

The FRP envisaged the state governments to underwrite cash flow shortfalls in discoms as equity or interest-free loans, if annual projections in FRPs were not achieved. Apparently, cash flows in some states are lower than expected and the state governments have not pitched in with timely capital support as there is a build-up of stress on the banks lending to these discoms. According to the Reserve Bank of India, there are delays in debt servicing, leading to the classification of loans under the SMA 2 category.

Banks had restructured INR 530 bn of the debt of select discoms under FRP, which was to be backed by respective state government guarantees. According to Financial Stability Report 2015, the moratorium period for the repayment of the principal amounting to INR 430 bn ended on 31 March 2015. The state governments might find it difficult to support repayments in FY16, given the limited fiscal space available. The aggregate book losses of all utilities selling to customers stood at INR 691 bn in FY13 (FY12: INR 726 bn) while the aggregate book losses on subsidy received basis were INR 699 bn (INR768bn).