S&P says electricity boards loan recast not to hit India’s sovereign rating

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."


Bharti Axa Life launches new traditional plan

Bharti Axa Life said its new plan provides guaranteed additions of up to 10% of each year's cumulative base premium paid, with life cover


Mumbai: Private insurer Bharti Axa Life on Monday launched a new traditional plan which it said offers customers guaranteed returns with life cover, reports PTI.


'Bharti Axa Life Secure Savings Plan' will offer guaranteed returns with life cover to customers, according to the company.


"Given the volatile investment scenario today, consumers are looking for safe investment opportunities that provide guaranteed returns. The new plan provides guaranteed additions of up to 10% of each year's cumulative base premium paid," Bharti Axa Life Managing Director and Chief Executive Sandeep Ghosh said.


The insurer is a joint venture between India's Bharti Enterprises and Axa, an international financial protection and wealth management firm. Bharti holds 74% stake in the venture and Axa the rest.



Sabapathy Narayanan

5 years ago

What is the opinion of ML on this guaranteed product?
Sabapathy Narayanan



In Reply to Sabapathy Narayanan 5 years ago

we will write review of this product today

Liquidity position comfortable, RBI says ahead of policy review

With liquidity situation within its comfort zone, the central bank said its monetary action next week depend upon developments in money market

New Delhi: Reserve Bank of India on Monday said the liquidity situation currently is comfortable and indicated that monetary policy action in the forthcoming mid-quarterly review next week would depend on latest developments in the money market, reports PTI.


"For the last several weeks..., liquidity levels have been within our comfort zone... (but) we monitor this on a daily basis", Subir Gokarn, deputy governor, RBI told reporters on the sidelines of a function.


RBI, he added, would take note of emergence of "signs of stress, particularly if they are likely to be persistent. We will take that into account...we have for quite some time realised there was stress in the market both in terms of quantity of liquidity adjustment facility (LAF) borrowings and in terms of the behaviour of the call rate which is the number we look at. There are no signs of stress at the moment".


The central bank, in its mid-quarterly review of monetary policy to be announced on 17th September, is expected to take steps to promote growth and also contain inflationary expectations. The RBI is also expected to respond to some bankers' demand for abolition of cash reserve ratio (CRR), the amount of money which banks are required to keep with the central bank in cash.


Answering questions on inflation and its impact on the forthcoming policy review, Gokarn said: "I don't have expectations. I don't cite expectations. We will look at the data when it comes".


The government is likely to come up with the August inflation data on 14th September. The wholesale price based-inflation in July slipped to 6.87% from 7.25% in the previous month.


The Reserve Bank has been taking open market operations (OMO) to pump in liquidity into the market by buying government bonds. The OMO, which is easy to implement, only has short term implications on the liquidity situation.


The CRR cut is more significant as it has lasting impact on the liquidity situation, sources said, adding the central bank would have to take into account various other factors, including the need for liquidity, before announcing any changes.


As of now, sources said, the central bank was keeping the options open and would act depending upon the need of the hour.


On currency fluctuation, Gokarn said: "Over the last several weeks, the currency has been relatively stable (as) there is a rough balance between inflows and outflows. We are obviously monitoring the situation and will react to it as appropriate."


The central bank had intervened in the foreign currency markets and taken administrative steps to check volatility in rupee-dollar exchange rate.


As regards India's foreign currency reserves, Gokarn said, "it's something that we have to measure against the potential short-term liability. That's something we have been benchmarking consistently and we have never been uncomfortable with the level of reserves which we had".


Intervention in forex market, Gokarn said, "has been one component of our approach to the exchange rate. Others have been in terms of some administrative actions which we took in November, December and later and in fact have rolled back some of those because we felt they were adding some stress or difficulty to the market and to the liquidity".


The third component, he added, "was to expand the channel available to foreign investors".


On the impact of the European Central Bank's (ECB) decision to buy unlimited sovereign bonds to save Euro, Gokarn said it would bring "some comfort to the investors across the board. We saw some of that in the immediate aftermath of the announcement and I suspect that is the way it will play out".


Besides ensuring liquidity in the markets, he said, the ECB decision would provide assurance that the European bond markets would remain very stable.


In order to deal with the financial problems of the eurozone countries, the ECB last week had announced a programme that would allow it to execute potentially unlimited sovereign bond-buying.


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