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Experts agree on carrot-stick method for discom rescue plan
21 Jul 2012, 04:52 PM  Watch Video
Electricity distribution companies (discoms) have been an area of darkness especially for bankers. Cumulatively, discoms owe banks Rs 2 lakh crore which have so far been kept the same because the loans have been rescheduled very often. The government is making a fresh effort to wipe out this legacy burden and ensure the distribution companies dont slip into losses again.

The governments plan is to take over 50% of loans owed to banks via bonds issued by state governments that can be traded or sold. The balance 50% will be converted into long-term loans of 10 years maturity. Discoms will not have to pay interest or principal for three years and can repay the balance in the next seven years.

The banks, in the first year of the governments rescue effort, will fund 70% of discoms losses to the extent to which revenues dont fall short of expenses. In the second year, the banks will fund 35% of the losses. By the third year, the discoms will have to stop making losses. To reduce losses, discoms are to raise tariffs every six months over a span of two years till revenues meet expenses and discoms should show proof of reducing transmission losses.

Besides, banks will also have an escrow facility on discoms revenues which allows the first right to revenues for interest payments. However, bankers are hopeful that discoms and state governments don't stoop to populist demands again.

CNBC-TV18's banking editor Latha Venkatesh, in this edition of Indianomics, speaks to former NDA power minister, Suresh Prabhu and MD Mallya, chairman, Bank of Baroda to try and understand if this plan to rescue the state electricity distribution companies is going to work.

Below is an edited transcript of the interview on CNBC-TV18.

Q: The proposal says that 50% of the loans will become bonds floated by state government companies and guaranteed by the state governments. Does this reassure the banking community? What if the governments dont honour the guarantees?

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