PSBs may Bank on UDAY to Free up ₹ 20,000 crore

Banks won’t be re­quired to make pro­vi­sion for bad loans to power sec­tor as more states join the scheme

The Economic Times - - Economy: Macro, Micro & More - Dheeraj.Ti­wari@ times­group.com

New Delhi: State-run banks will be able to free up about .₹ 20,000 crore of cap­i­tal as the on­go­ing re­forms in the power sec­tor will al­low them to re­duce their loan-loss pro­vi­sion­ing, a se­nior govern­ment of­fi­cial has told ET.

Fi­nance Min­is­ter Arun Jait­ley has sanc­tioned a mea­gre .₹ 10,000 crore for banks in the 2017-18 bud­get, which is seen by many as an in­di­ca­tion of his re­solve to see banks clean up their bal­ance sheets be­fore he opens his purse strings.

The of­fi­cial quoted above said banks will not be re­quired to make pro­vi­sions for bad loans to the power sec­tor in the next one year as more states come on board the power util­ity turn­around scheme, Ujwal Dis­com As­sur­ance Yo­jana (UDAY). “Banks are not to make any pro­vi­sions on the bonds is­sued. In to­tal, this is ex­pected to free up cap­i­tal of around .₹ 20,000 crore, which was mostly stuck due to pro­vi­sion­ing norms,” the of­fi­cial said.

Al­though nine state gov­ern­ments have is­sued bonds worth Rs 1.6 lakh crore, state elec­tric­ity boards of only Ra­jasthan and Ut­tar Pradesh have is­sued bonds so far. These bonds to­tal .₹ 23,082 crore.

Es­sen­tially, states are tak­ing over the li­a­bil­ity of the state elec­tric­ity boards and a state guar­an­tee will mean that banks will no longer be needed to make pro­vi­sion for bad loans to the sec­tor.

Launched in 2015, UDAY seeks states to take over 75% of the debt of power dis­tri­bu­tion com­pa­nies (dis­coms) by is­su­ing bonds. These bonds are mostly sub­scribed by banks, mu­tual funds and insurance com­pa­nies.

“Some of this lend­ing was al­ready clas­si­fied into non-per­form­ing loans, which at­tracted 15% pro­vi­sion­ing. As more states come up with bond is­suances, this will free up more cap­i­tal,” the of­fi­cial said.

The out­stand­ing debt of dis­coms was pegged at .₹ 4.3 lakh crore in 201415. The in­ter­est rate on this debt ranged from 14% to 15%.

“States are now com­pet­ing against Loan-loss pro­vi­sion­ing to fall as more states join dis­com turn­around scheme Banks not to make any pro­vi­sions on UDAY bonds as states tak­ing over li­a­bil­ity

“Some of this lend­ing was al­ready clas­si­fied into non-per­form­ing loans, which at­tracted 15% pro­vi­sion­ing. As more states come up with bond is­suances, this will free up more cap­i­tal.”

Out­stand­ing debt of dis­coms was pegged at 4.3 lakh crore in FY2015 and in­ter­est rate on this debt ranged from 14% to 15%

GOVT OF­FI­CIAL

each other to im­pro­vise the sit­u­a­tion so that they at­tract more in­vestors for their is­suances,” said the of­fi­cial.

But a banker said the in­vestors will be more cau­tious, given that Jhark­hand’s dis­com has slipped and is now sad­dled with huge ar­rears. “This does not in­spire con­fi­dence among in­vestors, al­though these bonds hold quasi sovereign guar­an­tee,” he said, adding that with elec­tions in some states, the sit­u­a­tion may turn worse.

Ac­cord­ing to a re­cent re­port by Moti­lal Oswal, the gap be­tween cost and rev­enue has widened in seven of the 21 states that par­tic­i­pated in UDAY.

“Dis­coms will have to look be­yond UDAY and fo­cus on over­haul­ing tar­iff struc­ture and re­duc­ing cost of sup­ply,” the re­port said. The Eco­nomic Sur­vey 2016-17 had also noted that the con­sol­i­dated deficit of states has in­creased steadily in re­cent years, ris­ing from 2.5% of GDP in 2014-15 to 3.6% of GDP in 201516, in part be­cause of UDAY.

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