Power lending to be linked to performance

As a result, the Power Finance Corporation(PFC) and Rural Electrification Corporation(REC), which together account for 60% of all money loaned to the power sector, will soon move away from fixed-rate lending and, instead, link their interest rates to the performance of the power distribution companies that are availing the loans, for both private and public sector customers.

In other words, greater the losses in power distribution, higher will be the interest rates.

“It is necessary that differential interest rates should be introduced by these two organizations," a senior power ministry official who did not want to be named, said.

The moves come as the ministry is increasingly concerned about power losses and its impact on the ability to meet the country’s growing power needs.

While power generation capacity is being enhanced significantly, the sector is hurting because of steep losses incurred from inefficiencies in power transmission and distribution. Such losses, called aggregate technical and commercial losses (AT&C), are about 40% of the power generated in the country, largely on account of theft and faulty equipment. The Planning Commission wants the states to lower the losses to an ambitious 15% by the end of 2012.

“The problem states are Uttar Pradesh, Madhya Pradesh, Maharashtra, Karnataka, Rajasthan and Haryana. Not only because of high losses, but also because of their lack of improvement," the official said.

While the ministry is hoping to get the states to improve their performance, there is also an attempt to get the two power lending organizations to work in a more coordinated manner. It also comes at a time when both REC and PFC are about to list some of their shares on the stock exchange. While PFC has just sought listing through an initial public offering, REC will follow suit in the first quarter of the next fiscal ending 2008.

The power ministry has also asked both institutions to coordinate their views on a project’s viability and also ensure that interest rates are the same for similar projects. In the past, it had been possible for a state whose project funding request was turned down by one institution citing non-viability of a project to get funds from the other institution.

The latest proposal also includes “no lending to a borrower who has defaulted on payments to the other organization," said the power ministry official.

PFC and REC loan money to develop new power projects and also to finance restructuring of power distribution utilities. While PFC has sanctioned loans worth about Rs20,000 crore during the first half of the current financial year, REC is expected to fund projects worth Rs10,000 crore in 2006-07.

The proposed changes augur well for both institutions as they will end up appropriately pricing the risks on their loans. By cleaning up their portfolios, the two companies will be able to better leverage their market borrowings, both in terms of size and rates at which they themselves borrow.

“This is a good move on the part of government as the biggest credit risk for the power sector comes from the distribution sector. Such a move will be an incentive for the power utilities to reduce their AT&C losses," said Kuljit Singh, a partner at Ernst & Young.

In a related move, the official said the ministry is also of the view that REC’s funds, which are cheaper to obtain because the institution’s bonds enjoy tax-free status, should only be used to provide lower interest rates to rural electrification projects, the primary reason for the establishment of the REC.

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