The government’s R1.9 lakh crore power sector debt restructuring package may face fresh hurdles with public sector banks (PSB) expressing reservations about subscribing to bonds proposed to be issued by financially weak state governments.
As per the package, states will bear half of the liability of distribution companies or state electricity boards (SEBs) in a phased manner in two to five years, while the balance will be restructured by banks by extending the repayment period from three to five years.
State governments have two options: Repay debt or adopt the debt recast plan and issue bonds, which currently do not have the statutory liquidity ratio (SLR) status. Given the economic slowdown and rising bad loans, banks have turned risk-averse, preferring SLR bonds which are easier to trade or liquidate.
Since the central bank mandates some SLR holding — now a minimum of 23% of net demand and time liabilities invested in government and other approved securities — banks prefer investments in state government bonds only if these bonds too have SLR status.
Banks have indicated that if state governments — especially those which have already breached their Fiscal Responsibility and Budget Management (FRBM) Act target of 3% of gross state domestic product or are near to it — choose to issue bonds, they would find it difficult to subscribe to them.
The package was planned keeping in mind the FRBM target, which means states must bring down their overall borrowings.
“If they (fiscally weak states) prefer the bond route without SLR status, banks may not subscribe. Without SLR status, there is no incentive for banks,” Punjab National Bank (PNB) chairman and managing director KR Kamath told FE.
However, power secretary P Uma Shankar told FE: “We don’t anticipate any problems as the package was finalised with the consent of the banks. It was indicated to the banks that these bonds may not get SLR status. We have not so far received any representation from banks expressing their reluctance.”
Sources say electoral considerations played a major role in crafting the scheme and the government bypassed the department of financial services’ reservations on some provisions. Though the power ministry had initially mooted SLR status, the proposal did not go through, they added.
Without SLR status, states may have to offer higher interest rates, which also means bigger outgo.
However, with the general elections in 2014 and some assembly polls next year itself, not many