Stress in bank balance sheets: FRBM panel suggests higher capital infusion for PSBs

Also says states should take over 100% of discoms’ debt under UDAY scheme

Written by Sunny Verma | New Delhi | Published: April 16, 2017 3:57:31 am
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A government-appointed committee to rewrite the fiscal responsibility laws has suggested the Centre to infuse much higher capital than Rs 70,000 crore committed under the Indradhanush plan over a four-year period ending March-2019. Higher capital infusion at a faster pace is required for the state-owned banks dealing with rising stressed assets, which erode the capital base, the committee tasked to review the Fiscal Responsibility and Budget Management (FRBM) Act has said in its report.

Citing rising losses of state power distribution companies or discoms as a main contributing factor to stress in bank balance sheets, the Committee has also suggested key changes in the Ujwal Discom Assurance Yojana (UDAY) to deal with the issue effectively. It said the states should take over 100 per cent of the debt of their respective discoms, instead of the earlier provision 75 per cent.

This will further reduce the interest costs for the discoms and raise their average revenue realised (ARR).

“There should not be further bank financing of operating losses of discoms and instead, state governments should make a firm commitment to underwrite the shortfall in the revenue of discoms as equity or interest free loan on an annual basis,” the committee said in its report. It also recommended that the food credit to centralised procurement states to be routed only through the Food Corporation of India (FCI), guaranteed by the central government.

This would streamline the process, improve the efficiency, and minimise disputes between the procuring states and the FCI that lead to persisting irregularity in the food credit account of the concerned states, it said.

Noting that the banks’ stressed assets have risen to 9.1 per cent by September 2016 from 5.1 per cent in September 2015, the Committee said: “the newly designed UDAY scheme aims to improve the financial health of power utilities, but it solves only the debt “stock” problem whereas the “flow” problem continues to exist.” Under the UDAY scheme, 75 per cent of the “stock” of debt outstanding as on September 30, 2015 is envisaged to be taken over by the state governments over a two- year period, but 25 per cent of the debt outstanding as on September 30, 2015 will, however, remain in the books of the discoms.

“The debt that will continue to be in the banks’ books will be charged an interest of 0.1 per cent over the base rate. Despite the renegotiation of the interest rate, the discoms will have a “flow” of operating losses because their average cost of supply will continue to be higher than the average revenue realised,” the committee headed by former revenue secretary NK Singh said in its four-volume report released on Thursday.

Infrequent revisions in electricity tariffs and their implementation by the State Electricity Regulatory Commissions, as well as the high aggregate technical and commercial (AT&C) losses mean that discoms will continue to incur losses. The committee, therefore, suggested the state government taking over entire debt of discoms and underwriting any shortfall in revenue of discoms as equity or interest free loan on an annual basis.

On capital infusion in public sector banks, the panel said the commitment by the Centre for infusing Rs 70,000 crore in four years is inadequate. The finance ministry has estimated banks capital needs at Rs 1.80 lakh crore by March 2019, of which it expects banks to raise Rs 1.10 lakh crore from market and internal accruals.

It noted that banks’ capital needs are much higher as the “NPAs of banks have increased, partly due to recognition of bad assets, affecting banks’ profitability and their ability to augment their capital base through internal accruals.” The quantum of capital infusion by the government perhaps may need to be much higher and at a pace quicker than the earlier estimations and commitments, it said.

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