The ratings agency also warned that the CDR proposal will resolve the underlying debt burden of electricity distribution companies and not the fundamental flaws in their business model of high leveraging, low tariffs and abnormally high T&D losses
Mumbai: Rating agency Standard & Poor's (S&P) on Monday said the proposed Rs1.2-trillion debt restructuring of struggling state electricity boards (SEBs), which it termed as a 'short-term solution', will neither impact the sovereign rating of the country nor banks, reports PTI.
"The proposed debt recast does not significantly affect our sovereign rating on India, instead it could be positive in the medium-to-long term," S&P credit analyst Rajiv Vishwanathan told reporters in a conference call.
The observation is likely to offer a big breathing space to the Indian government as global rating agencies are set to visit the finance ministry mandarins this month to review the country's sovereign rating.
S&P had spooked the government and markets in April when it cut the sovereign outlook to negative while retaining the BBB- rating. Any negative action on the rating front will leave the investment grade of the country to junk status, as the BBB- is the lowest investment-grade rating by S&P.
Positive, he said, because the corporate debt restructuring (CDR) proposal also seeks to reform the troubled power sector and it will give some breathing space to the SEBs.
In June, the government, in a bid to help the struggling power sector, especially the state-run SEBs and improve capacity, had cleared a plan to recast Rs1.2 trillion working capital debt the SEBs to long-term loans under which half of the loans will be transferred to the respective states, which in turn will provide guarantees to bonds that the SEBs will issue to banks. The proposal is awaiting the Reserve Bank nod go-ahead. .
The power sector, both generation as well as distribution companies in the public and private sectors, together have a debt pile of Rs3.3 trillion or 7.2% of the total bank credit, S&P said. Out of this total, according to S&P, 25% are with SEBs, which are into both generation and distribution.
As of FY12, the banking system as a whole had an exposure of 7.5% to the power sector, which by the end of the June quarter came down to 7.2%. As of the June quarter, the bank credit stood at a tad over Rs45 trillion, says S&P Ratings Services.
Releasing the report, titled 'Indian power sector debt restructuring proposal: A salve, not a cure,' Vishwanathan said, "the recent government proposal to restructure debt of SEBs will provide them only a temporary reprieve from weakening finances. The proposal is in itself unlikely to adequately speed up the growth in the power capacity to meet snowballing demand.
"We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the power sector woes," added Vishwanathan.
The report also warned that the CDR proposal will resolve the underlying debt burden of discoms, not the fundamental flaws in their business model-high leveraging, low tariffs and abnormally high T&D losses which is highest in Asia at around 30%.
The report further said the country urgently needs to provide more lasting solutions to its power problems as proposed the restructuring at best could provide the loss-making discoms a reprieve and help them to cover costs in short-term only.
On the impact of the 30th July, 31 outage in the Northern and Eastern states, which saw nearly 700 million living in the dark for two consecutive days, S&P said, "the grid failure though affected 20 of the 28 states, had little impact on industry as several companies have broken away from state-supplied electricity, and now depend on their own captive power plants.
"However, we believe that such a practice reduces the competitiveness of businesses and deters investments by overseas companies," Vishwanathan said.
He further said, the CDR will not help bring in investments into the sector, if this is not accompanied by transparent tariff regulations and reliable fuel supply apart from hiking tariffs that can meet the cost of fuel as raw material cost is shooting up.
"A reliable fuel supply, in turn, hinges on availability of timely clearances and a transparent framework for producing fuel, and the presence of adequate infrastructure for transporting fuel," he pointed out.
The report also called for the crying need to improve the credit quality of the discoms and allow greater private sector participation in power transmission and distribution to provide a long-term solution to power shortages.
Noting that the country has still one of the lowest power tariffs in the Asia, it noted that the country has the highest transmission and distribution losses, which stands at around 30% against a global average of 5 to 10%.
"The cost of doing business here could increase if the cycle of high system inefficiencies, technical and commercial losses, and under investment in capacity continues," S&P said, adding "this could in turn affect the growth prospects in the long run and weigh on the sovereign rating."