India OKs bailout for power distributors; no reforms

NEW DELHI (Reuters) - The cabinet approved a plan on Monday to bail out cash-strapped power distributors saddled with more than $35 billion in debt, but which analysts said offered little to reform a sector whose dysfunction has exacerbated a growth-sapping energy crisis.

The country's mostly state-owned distribution utilities are drowning in losses and were blamed for triggering one of the worst blackouts in history in July, when power was cut for two consecutive days in an area with 670 million people.

Years of populism, corruption and mismanagement have driven power distributors into losses, which amounted to 1.9 trillion rupees by the end of the 2010/2011 financial year, necessitating their second bailout in a decade.

Under the rescue plan, state governments will take on half of power distributors' resulting short-term debt over the next two to five years and convert it into long-term bonds, a government statement said after the cabinet approved the bailout.

Lenders, which are mostly government-run banks, will recast the rest into long-term loans and offer a moratorium on repayment of principal.

"This restructuring will benefit the entire power sector value chain as power generators and traders can expect timely payment from distribution companies," said Salil Garg, director of the Indian unit of rating agency Fitch.

This would also mean distributors will have more funds to buy power and can step up supplies to factories and homes, which now resort to expensive diesel generators and solar panels to plug their energy gaps.

For lenders with huge exposure to distributors, the bailout plan offers an easy way to keep their books clean. But they will have to wait longer to be paid back, hampering their ability to repay short-term liabilities.

"The concern that banks will have large non-performing assets on account of distribution companies is subsiding now," said Manish Ostwal, banking analyst at Mumbai-based brokerage KR Choksey.

It was not immediately clear whether lenders will also be expected to accept lower yields on the restructured loans.

With loans to power distributors accounting for 4-7 percent of their respective books, Indian Bank (INBA.NS), Union Bank of India (UNBK.NS), Bank of India (BOI.NS), Oriental Bank of Commerce (ORBC.NS) and Canara Bank (CNBK.NS) are among those with the highest exposure, according to a report by Bank of America Merrill Lynch.

HALF MEASURES

The bailout package is the latest in a series of actions by Prime Minister Manmohan Singh's government, which has been hit by a spate of scandals and accused of dithering over policies needed to address structural problems slowing down Asia's third-largest economy.

The plan, however, does not address long-term problems in the sector, analysts said.

"The debt restructuring as it stands appears largely a breather as it is not accompanied by any concrete reform measures," Kameswara Rao, a partner at consultancy PricewaterhouseCoopers, said before the cabinet approval.

Distribution companies, under political pressure to sell below cost and losing more than a quarter of their power supply to theft and decrepit networks, have been borrowing for years to fund their losses.

Kuljit Singh, a partner at consultancy Ernst and Young, said the government should bring private players into power distribution, which would make the sector healthier in the long run.

Under the plan, the federal government will offer monetary incentives to states to reduce distribution losses and will reimburse 25 percent of the principal repaid by the states.

(Additional reporting by Swati Pandey in MUMBAI; Rajesh Kumar Singh, Arup Roychoudhury, Nigam Prusty and C.K. Nayak in NEW DELHI; editing by Jane Baird)