Bonds to clear power loans may be a dud

MUMBAI: The use of power sector bonds to pay off bank loans may be a non-starter as banks may not be better off if loans are converted into bonds. Market players have also been sceptical about investors buying these bonds if banks wish to sell them in the secondary market.

Many senior bankers felt that the bonds would be issued to the lenders, thus extinguishing the liability of the discoms. But, Union Power Minister Piyush Goyal has said that the bonds will carry 8% interest rate against the 12% on the loans to the discoms. “That will be an immediate hit for the banks,” Reserve Bank of India Governor Raghuram Rajan said. “The banks will take a view on what they want to do with the loan.

Ultimately, the loan is from the bank to the discom,” said Rajan. “What we have to see is how the final structure emerges. Banks have boards and they have to take the decision based on their capacity.” There could be a situation where state governments, which own the power distribution companies, take over 75% of their debt as of September 30 and pay back lenders by selling bonds. For the balance 25%, discoms will issue bonds.

“It would be difficult to find investors for bonds with longer maturity,” a treasury head with an insurance company said. The bonds will not enjoy SLR status like central government bonds. The SLR status increases investors interest.

The RBI has emphasised that gaps in distribution networks and deteriorating financials of discoms need to be addressed fast.