Banks worried about Rs 2 lakh cr debt recast plan for power utilities

Corporate debt restructuring (CDR), which has already seen a fivefold jump in Q1 of the fiscal, is set to break new records with the Centre planning to recommend a whopping Rs 2 lakh crore debt of highly-stressed state power utilities to the CDR cell.

During the just concluded quarter, the banking sector has seen the quantum of restructured loans rising over fivefold to Rs 20,040 crore, up from Rs 4,950 crore in the year ago period, sources at the CDR cell said.

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According to the Union Power Ministry, the Cabinet is likely to take up a proposal to recast about Rs 2 lakh crore debt of the power distribution companies, whose precarious financials have raised concerns of default in the banking system.

This comes over and above the Rs 30,000 crore CDR that five state-run discoms of Tamil Nadu, Madhya Pradesh, Rajasthan, Punjab and Haryana had availed last fiscal.

A senior official of a city-based state-run bank expressed surprise at the move saying, "Any more CDRs will have serious repercussions on the banking system as it comes on the back of an already historic rise in CDR cases due to deepening slowdown in the economy."

Though he admitted that all CDR cases do not end up in losses for banks, as the historical average of CDRs turning up as losses is only 4-5 percent and 18-20 percent of them become NPAs, he said the sheer rise in the CDR proposals is itself disconcerting.

"The rising number of NPAs and CDRs can impact our ratings, which are already under strain," an official of another state-run lender pointed out.

However, the country's largest lender State Bank of India Chairman Pratip Chaudhuri had last week defended the CDR mechanism as "a welcome platform" where the bankers can take a collective call to recover their money at a later date.

"The CDR is a welcome platform where all the banks come together and I would think that it is possibly the nearest approximation to the chapter 11 bankruptcy proceedings in the US where all creditors come on one forum and evaluate their relative positions and the company's ability to meet all the outstanding restructuring - is a very common practice globally," Chaudhuri had said.

Power Secretary P Uma Shankar last Friday had said the Ministry had already finalised a CDR proposal for the discoms to tune of Rs 2 lakh crore with a view to provide assistance to them.

"It will be an interim financing arrangement (based) on a tight reform path... The Cabinet is likely to take up the proposal in the next 15 to 20 days," he had said.

About 50 per cent of the debt would be converted into bonds that would be issued by the respective states and the the remaining 50 percent liabilities will be restructured. Discoms would be provided a three-year payment moratorium.

Chaudhuri had also called for discoms going public as a lasting solution to their problems, saying "state-run discoms and generating companies should try to get listed as stock market pressures can help drive professionalism in such companies."

"Listing will make them more viable and would make them adopt more enlightened and commercial policies," he had said.

Last week, the Reserve Bank had also warned against the asset quality of banks' exposure to the power sector in its financial stability report.

"Potential pressures on asset quality have intensified with restructuring in bank credit to the power sector registering a sharp increase, especially in the last quarter of FY12, even as impairments as a ratio of outstanding credit has moderated," the RBI report noted.