See this article on SEB’s going bankrupt - the issue is counterparty risk for borrowers of PFS. Being in TN, I can tell you that 8-9 months of delay in payment is normal and for one to get the cheque out, 3-5% greasing is also required. This is real stuff on the ground.
Too many people get carried by the macro story - I think a little bit of of kicking of tires on the ground is required.
with mounting losses, the Rajasthan State Electricity Board (SEB) today asked
banks to consider a second round of restructuring for a colossal Rs.550bn.
Merely two years after the execution of an Rs.380bn restructuring package, the
second restructuring request raises serious concerns on a) the perception of
restructured SEB assets being watertight viz. perpetually being classified
standard and a near zero likelihood of being classified NPA b) other loss
making SEBs following suit. With the RBI taking an unequivocal stand on the
issue of not extending regulatory forbearance beyond FY15 and the preference
for a quick clean-up of banks’ balance sheets, we believe special dispensation
on a second round of restructuring is unlikely. In the worst case scenario of
all restructured SEBs eventually turning NPA, we foresee 4-49% erosion to
current FY16/17 ABV estimates, with Canara Bank, Bank Of India, Punjab National
Bank and South Indian Bank being the worst affected.
aegis of the Financial Restructuring package (FRP) implemented in October 2012,
~Rs0.6tn of short term loans to SEBs was restructured by Indian Banks, with a
three year moratorium. The restructuring package was to be accompanied by steep
tariff hikes, reduction in AT&C losses and improving collection
efficiencies all aimed at restoring the financial health of SEBs. Inadequate
tariff hikes (between 8-20%) over FY12-FY15, political apathy in view of
impending state polls and continued AT&C losses have failed to yield the
desired results – SEB losses for FY14 remained steep at an estimated Rs.700bn
as against Rs.920bn in FY12. Given that the FRP was in essence ‘substitution of
a short term loan with an additional long term loan’ and bereft of any interest
benefit, we had cautioned investors on the fragility of the package, pointing
out that the FRP was only a rehash of a similar bailout package executed in
like to highlight the live risk of possible SEB defaults adding to an already
prolonged asset quality down cycle. Classifying SEB exposures as NPA would
bring forth a snowball effect of falling NIM, higher loan loss provisioning,
NPV diminution, increasing need for capital infusion and a 4-10bps decline in
FY16/17 RoA. Amongst the PSU pack, only State Bank of India remains relatively
insulated, with BOB coming in second best. We make no changes to our
recommendations and remain negative on PSU banks.