Debt Recast For Power Discoms: Centre Likely to Put the Ball in States' Court
State Govts Could Take Over 100% Loans; States Wary This May Lead to New Issues
They said the plan would, in fact, bail out banks, whose debt exposure
of Rs 3.17 lakh crore (as of June 2015) was feared to turn into
non-performing assets (NPAs).
To enable states to take over the entire debt, the Centre will also relax the borrowing limit for state governments. "States are being given a relaxation of 25 basis points to one percentage point in their Fiscal Responsibility and Budget Management (FRBM) limit. This will help them absorb the losses and issue bonds in the short term," said an official in the know of the matter.
The Union Cabinet is likely to approve the new scheme shortly. But most states are still wary that the scheme might create a new set of problems, rather than bailing out discoms. To begin with, the central government is focusing on the eight states that together account for the biggest chunk of the total accumulated debt of Rs 3.17 lakh crore. These are Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana.
In the United Progressive Alliance (UPA) government's FRP, state governments were to take over half the outstanding loans of state power discoms and convert that into bonds backed by state government guarantees. The remaining debt was to be restructured by banks. This time, however, the state government will take over 80-100 per cent of the discoms' debt and convert it into bonds. The rest (if any) will be serviced though technical reforms and tariff increase.
Sources in the know said if a state government failed to honour the bond terms or defaulted on the dividend payment, the Centre would divert the tax devolution amount from that state's kitty to the bond owners.
The tax devolution from the Centre to states is 42 per cent of the total divisible pool offered. A portion of it will be deducted from the Centre's share in the state's revenue and used for paying dividends.
At his meeting with state government officials from the energy and finance departments, Union Power Minister Piyush Goyal said the Centre was ready to relax the borrowing limit for states.
FRBM places limits on the deficit a state can have. A relaxation on this will translate into states being allowed more fiscal deficit in their public accounts. The current FRBM limit is three per cent. The amount of relaxation could vary on the basis of the amount of debt held by the state concerned. For instance, if a state gets 3.25 per cent relaxation, its borrowing limit will be close to six per cent.
"There is no debt servicing by the Centre; only the borrowing limit is increased. But the extra debt that the state government is burdened with and the interest payment that we will have to make annually could cause the state's finances to slip into the red," said a senior state government official who was part of the discussion.
Most states are of the view that this is a temporary measure - in three to five years, either the discom or the state government or both will again be financially pressed.
"The Seventh Pay Commission (recommendations) will come into force from January next year. Then, there also are other factors that will increase states' expenditure. For example, the debt of discoms will further burden us in the state budget," said a senior government official from the Uttar Pradesh government. This sentiment was echoed by officials of other states who were part of the several discussions with the Union power and finance ministries and spoke to Business Standard. They said the Centre could go ahead and make changes to FRBM but the solution was not a long-term one.
The National Democratic Alliance (NDA) government at the Centre is
likely to put on states the onus of restructuring the debt of power
distribution companies. Under the new financial restructuring plan (FRP)
for discoms, the state governments are to take over the entire debt of
these firms. Banks and other lenders would not be asked to restructure
any part of the loans, said senior central and state government
officials.
RADICAL CHANGE
NDA govt's FRP
UPA govt's FRP
To enable states to take over the entire debt, the Centre will also relax the borrowing limit for state governments. "States are being given a relaxation of 25 basis points to one percentage point in their Fiscal Responsibility and Budget Management (FRBM) limit. This will help them absorb the losses and issue bonds in the short term," said an official in the know of the matter.
The Union Cabinet is likely to approve the new scheme shortly. But most states are still wary that the scheme might create a new set of problems, rather than bailing out discoms. To begin with, the central government is focusing on the eight states that together account for the biggest chunk of the total accumulated debt of Rs 3.17 lakh crore. These are Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana.
In the United Progressive Alliance (UPA) government's FRP, state governments were to take over half the outstanding loans of state power discoms and convert that into bonds backed by state government guarantees. The remaining debt was to be restructured by banks. This time, however, the state government will take over 80-100 per cent of the discoms' debt and convert it into bonds. The rest (if any) will be serviced though technical reforms and tariff increase.
Sources in the know said if a state government failed to honour the bond terms or defaulted on the dividend payment, the Centre would divert the tax devolution amount from that state's kitty to the bond owners.
The tax devolution from the Centre to states is 42 per cent of the total divisible pool offered. A portion of it will be deducted from the Centre's share in the state's revenue and used for paying dividends.
At his meeting with state government officials from the energy and finance departments, Union Power Minister Piyush Goyal said the Centre was ready to relax the borrowing limit for states.
FRBM places limits on the deficit a state can have. A relaxation on this will translate into states being allowed more fiscal deficit in their public accounts. The current FRBM limit is three per cent. The amount of relaxation could vary on the basis of the amount of debt held by the state concerned. For instance, if a state gets 3.25 per cent relaxation, its borrowing limit will be close to six per cent.
"There is no debt servicing by the Centre; only the borrowing limit is increased. But the extra debt that the state government is burdened with and the interest payment that we will have to make annually could cause the state's finances to slip into the red," said a senior state government official who was part of the discussion.
Most states are of the view that this is a temporary measure - in three to five years, either the discom or the state government or both will again be financially pressed.
"The Seventh Pay Commission (recommendations) will come into force from January next year. Then, there also are other factors that will increase states' expenditure. For example, the debt of discoms will further burden us in the state budget," said a senior government official from the Uttar Pradesh government. This sentiment was echoed by officials of other states who were part of the several discussions with the Union power and finance ministries and spoke to Business Standard. They said the Centre could go ahead and make changes to FRBM but the solution was not a long-term one.
RADICAL CHANGE
NDA govt's FRP
-
100% debt to be taken over by states; if less is taken over, the balance to be serviced through reforms and tariff hike
-
State governments to issue sovereign guarantee bonds
-
No part of debt to be serviced by banks or financial institutions
-
Centre to relax borrowing limit for states
- If states default on dividend payment to bonds owners, part of their tax devolution fund to be used for payment to bond owners
UPA govt's FRP
-
State government to take over 50% of discoms' debt and convert it into bonds backed by sovereign guarantees
-
The remaining debt to be restructured by banks with a three-year moratorium, or a repayment holiday on principal repayments
-
Madhya Pradesh serviced its debt through bonds in 2011, but this was out of the FRP scheme
- Tamil Nadu also started a debt-restructuring process
Reference - http://www.business-standard.com/article/economy-policy/debt-recast-for-power-discoms-centre-likely-to-put-the-ball-in-states-court-115100500051_1.html
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