* States to take half of debt, banks to recast rest
* Seven states have total of $35 billion short-term debt
* Cabinet to consider bailout plan on Monday
By Sanjeev Choudhary
NEW DELHI, Sept 24 India is set to offer a
bailout to its cash-strapped power distributors that would help
restructure more than $35 billion in debt but do little to
reform a sector whose dysfunction has exacerbated the country's
growth-sapping energy crisis.
The country's mostly state-owned distribution utilities are
drowning in losses and w er e b lamed for triggering probably the
worst blackout in history in July, when p o wer was cut for two
consecutive days in a massive area home to 670 million people.
The federal cabinet will consider the bailout plan, the
second in a decade, when it meets at 5.30 pm (1200 GMT) on
Monday, officials said.
Shares in some Indian power sector lenders and power
producers rose 2-3 percent on hopes that the cabinet would
approve the plan, the latest in a series of actions to address
structural problems slowing down Asia's third largest economy.
A lifeline for power distributors would free up cash and
help them buy more power to supply factories and homes that
resort to expensive diesel generators and solar panels to plug
their energy gaps.
Last week, the government cut subsidies on diesel and opened
up the country's vast retail sector as well as aviation to
foreign investment to win back investor confidence and attack
the country's ballooning fiscal deficit.
Prime Minister Manmohan Singh, defending the measures, said
"money does not grow on trees" and that failure to bridge the
gap between government spending and income would stoke inflation
and lead to further loss of confidence in the economy.
Under the rescue plan for power distributors, provincial
governments will take on half of their short-term debt and
convert them into long-term bonds over the next three years.
Lenders, who are mostly government-run banks, will be asked
to turn the rest into long-term loans and offer a moratorium on
repayment of the principal for three years. But they will not be
expected to reduce interest rates on the restructured loans,
Montek Singh Ahluwalia, the deputy chairman of the Planning
But analysts said the bailout plan did not address the
country's long-term energy problems and may only drag government
lenders deeper into the red.
"The debt restructuring, as it stands, appears largely a
breather as it is not accompanied by any concrete reform
measures," said Kameswara Rao, a partner at consultancy
With loans to power distributors accounting for 4-7 percent
of their respective books, Indian Bank, Union Bank of
India, Bank of India, Oriental Bank of
Commerce and Canara Bank are among those
with the highest exposures, according to a report by Bank of
America Merril Lynch.
The country's largest lender, State Bank of India,
and leading private banks have no exposure to the distributors,
according to the report.
"The restructuring could worsen their (banks') asset
liability mismatch," Rao warned. That is because banks will have
to wait longer to be paid back, hampering their ability to repay
Years of populism, corruption and mismanagement have driven
power distributors into losses that had accumulated to 926
billion rupees ($17.35 billion) by the end of financial 2010/11.
Under political pressure to sell below cost and losing more
than a quarter of power supply to theft and decrepit networks,
distribution companies have been borrowing for years to fund
Just seven of the country's 28 states - Rajasthan, Uttar
Pradesh, Haryana, Tamil Nadu, Punjab, Madhya Pradesh and Andhra
Pradesh - have between them accumulated short-term debt of 1.9
trillion rupees ($35.6 billion) from power distribution.
($1 = 53.36 Rupees)
(Additional reporting by Swati Pandey; Editing by Sanjeev