Just like cancer, the persistent power sector circular debt has severely crippled the countrys economy. Battered by structural issues in the power supply chain, the government doles out just enough funds to keep afloat every time the issue reaches a threatening level.
As the government rolls out TFCs for these drop-in-the-ocean payments, the circular debt issue persists.
To curtail the rising net inter-corporate circular debt, which has nearly doubled to Rs 258 billion in the first ten months of FY11 over the year-ago period, government officials are pondering over the conversion of both existing outstanding debt and TFCs into long-term government papers i.e. the PIBs.
The proposal bodes well for the borrower - the government - since it will restructure existing liabilities into long-term financing. The conversion of loans into the sovereign instrument will also cut down the overall cost of financing. Moreover, since these bonds are negotiable in nature, lenders will have the option of selling them in the secondary market, later.
The best part of the deal is that the initiative will not hurt the existing liquidity in the banking system since it will not result in the disbursement of new funds. Instead, the existing loans will be converted into bonds.
However, since the proposed amount is rather huge, the market is concerned that any such move would increase the supply of PIBs, thereby, reducing the prices of sovereign bonds in the secondary market. The industry sources suggest that a total of Rs 236 billion of PIBs have been issued in the past ten years.
Critics argue that the issuance of bonds in a single tranche will also reduce market appetite for bonds in the scheduled PIB auctions. Given this scenario, policy analysts recommend the government should issue PIBs in a phased manner.
With PIBs yields slightly above 14 percent, the existing risk-free rate provides a good opportunity for banks to lock-in their investments for longer period tenures. On the flipside, however, a few quarters are still reluctant to hold huge sums in PIBs at existing rate, given their fears of further rise in interest rates.
While that may be an outside chance, since the broad consensus is that interest rates have peaked, the government, in order to strike this deal, might still need to extend incentives to the banks that are demanding an increased weight of PIBs in the SLR requirement.
But at the end of the day, this proposal will remain as a stop-gap measure since the real solution to circular debt lies in addressing the root causes such as the failure to rationalise power tariffs, line losses, power theft and other systemic inefficiencies.
Comments
Comments are closed for this article.