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• Alarmed at the mounting over dues from state owned power utilities, public sector banks want fresh lender support to be fully backed by state government guarantees.State utilities outstanding debt to the public sector banks is presently about Rs 49,131 crore, top bank officials said. Bankers worry is that only 42 per cent of the advances to state power utilities were collateralised or supported by state government guarantees. The remaining advances were clean or lenders have recourse only to underlying assets of the utilities.Utilities are at present faced with accumulated financial losses in excess of Rs 82,000 crore, which is the main worry of the lenders. The losses indicate that the utilities ability repay bank debts was under severe stress. With guarantees available only for Rs 20,740 crore, the stress is on the remaining component of the loans, bankers said.
• Bank officials said that they were not averse to any kind of debt restructuring. In fact, some states like Tamil Nadu have sought a corporate debt restructuring mechanism that would allow them to defer some of their maturing loans. Besides, banks were also willing to take some haircuts in extending the CDR.In making the concessions, banks have insisted on the entire amount debt restructured, to be fully collateralised. Banks want a mechanism identical to the funding covenants that Power Finance Corporation or Rural Electrification Corporation apply to their respective advances. Both PFC and REC advances are fully secured by promoter guarantees. Promoters of power utilities that have incurred the debts are the state government. The demand consequently implied that the state government would have to provide guarantees to lenders. This would be in addition to the charge on the assets and revenues during the debt repayment period.
• However, lenders are not willing to just settle for unfunded guarantees. Corporation Bank chairman and Managing director Ajai Kumar said, “If a guarantee is provided by the state government, the amount needs to be fully provided in the state government budget. Otherwise it is no guarantee at all.” A fully funded guarantee implied that in the event of defaults by the borrowing utilities or the guarantor declining to meet obligations, lenders have the option to recover their dues through preemption of central transfers to the states.
• For the lenders such a mechanism also provides a route for conserving capital. State Bank of Mysore managing director, Dilip Mavinkurve said, “If a guarantee is provided to the lenders, then it means the lenders need to provide CRAR (capital to risk weighted asset ratio) of just 20 per cent.” Presently conservative banks provide a CRAR of 12 per cent. This means that for every Rs 100 lent, they aside Rs 12 as a capital charge. A reduced risk weighting for the state government guarantees implied that they need to provide only Rs 2.4 for every Rs 100 advanced.The mechanism provides comfort for the lenders, since loans to the utilities become supported by implicit sovereign guarantees. Mavinkurve said, “The ideal comfort for the lender is when the guarantees fully cover the dues owed by the state utilities to the banks.”
• But not many states are comfortable with this mechanism. This is because guarantees would have fiscal implications on the respective state governments. States are presently expected to restrict their fiscal deficits to 3 per cent of the gross state domestic product. The mechanism for securing dues to the lenders also entailed creation of a separate guarantee redemption fund that was recommended by the 12th finance commission. Only 10 states have so far set up this fund. The report of the high level panel on the financial position of distribution utilities chairmed by former comptroller and accountant general V K Shunglu, quantified the amount available in this guarantee redemption at Rs 4,000 crore or just about 5 per cent of the outstanding debt. That means indebted states would have to increase the corpus of the guarantee fund and incur a fiscal slippage.

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