RBI moves to boost bonds issued by states under UDAY

Mumbai: The Reserve Bank of India (RBI) has allowed banks to classify bonds issued by state governments as part of the Ujwal Discom Assurance Yojana (UDAY) scheme under the held-to-maturity (HTM) category, two people familiar with the development said.

RBI had in a recent letter to the treasury departments of banks said that bonds issued to retire debt given to power distribution companies (discoms) can go to the HTM portfolio of the banks, said a public sector banker, one of the two persons quoted above.

Classification of bonds under HTM shields such investments from mark-to-market losses. Under the UDAY scheme, state governments would convert 75% of the debt of their respective discoms into state government bonds. On 27 February, RBI had indicated that it would consider allowing UDAY bonds to be held under HTM though no formal circular has been issued. State governments that have signed up for the UDAY scheme have already begun issuing bonds to banks.

Power minister Piyush Goyal had on Wednesday tweeted that Rajasthan issued UDAY bonds at a coupon, or interest rate, of 8.39%. This is lower than the 8.55% paid by the state to raise Rs.1,000 crore at the last state government bond auction on 8 March.

What makes this possible is a single diktat by the centre that state government bonds issued in lieu of discom loans will be issued at a coupon of up to 75 basis points over the corresponding benchmark 10-year central government bond. A basis point is one-hundredth of a percentage point.

Apart from the additional state government debt that banks will now be sitting on, they will also have to take a hit of about 3-4% as these bonds have a far lower yield than the interest on loans given to discoms. Lenders had extended loans to discoms at 12-14% while most of these bonds will end up paying no more than 8.50%.

The positives for banks are that the remaining discom loans would attract lower provisioning now as they would be classified as standard.

“Due to change in the ownership/structure of the loans, it should get upgraded to standard category immediately. SEB (state electricity board) restructured loans account for 1-3% of total loans for PSU (public sector unit) banks,” Parag Jariwala, vice-president (institutional research, banking and financial services) at Religare Capital Markets had said in a report on Wednesday.

Jariwala said that banks that have the highest exposure to discoms will benefit the most. SEBs, with a combined debt of Rs.4.30 trillion and losses of around Rs.3.8 trillion, have been on the brink of financial collapse. Many distribution utilities are saddled with losses due to theft, besides transmission and billing inefficiencies. They often purchase expensive power to tide over short-term deficits and many utilities are yet to revise tariffs to desired levels.