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
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%
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.