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Distribution firms borrowing on negative net worth

Distribution firms borrowing on negative net worth

New Delhi/Mumbai: The electricity distribution utilities of Tamil Nadu, Bihar and Punjab have loans worth 61,000 crore against their name and an aggregate net worth of a negative 34,000 crore.

In all, distribution firms across India, most of which are owned by the states, owe a staggering 1.77 trillion.

The numbers point to the increasing possibility of a debt crisis in the Indian banking system. While 60% of the loans were given by state-owned Rural Electrification Corp. Ltd and Power Finance Corp. Ltd (PFC), the rest have come from banks.

Although none of the loans have yet been classified as bad loans, or non-performing assets (NPAs), they are being closely tracked by banks. According to a Mint analysis last week, the NPAs of 36 listed banks have risen 33% over the past year.

On Wednesday, citing concerns over asset quality, rating firm Moody’s downgraded the outlook on India’s 64 trillion banking sector to negative from stable.

State electricity boards (SEBs) are using the money to “meet their working capital requirements" despite taking them for “capacity addition", said a senior government official, who did not want to be named.

The fault isn’t that of the distribution utilities, said a PFC executive, who did not want to be named. “The responsibility lies with the state government," he said.

No distribution utility has as yet approached the bank with a restructuring plan, said M. Narendra, chairman and managing director of Indian Overseas Bank.

Most Indian states are loath to charge adequately for electricity, especially that supplied to farmers, out of fear of antagonizing their voter base.

Many distribution utilities are saddled with losses arising from theft, inefficient transmission and billing inefficiencies. Some regularly buy expensive power to tide over short-term deficits, and many haven’t revised rates in years.

India has 73 distribution utilities, including a handful of private ones in states such as Delhi that have privatized electricity distribution.

The poor financial health of these distribution firms means they cannot raise money at all, or can do so only at very high interest rates.

Worse, since they are the main customers of power generation companies, there is a growing reluctance among both investors and financiers to invest in the latter.

Ideally, distribution companies “should be able to generate surplus and meet their obligations", said India’s power secretary P. Uma Shankar. “A number of state governments are already taking steps to put in order the finances of their distribution companies." That includes aligning tariffs, converting government loans into equity, increasing their liquidity and providing them with interest-free loans.

Thus far, distribution utilities have been able to service their loans, said Santosh Nair, deputy managing director (corporate banking) at State Bank of India (SBI).

Still, “while state electricity boards have not become NPAs yet, but they are showing some signs of stress and we may have to restructure" loans issued to some of them, he added.

SBI has an exposure of around 1,200 crore to distribution utilities and 9,000 crore in all to SEBs. There is no “stress visible so far", said M.D. Mallya, chairman, Indian Bank’s Association, and chairman and managing director of Bank of Baroda.

If banks aren’t worried it is because, as D. Sarkar, executive director of Allahabad Bank, puts it, the distribution companies are “backed by government guarantees".

While that may be the case now, it is unlikely that distribution utilities will be able to continue to service debts as their losses increase.

The cumulative losses of the distribution utilities are around 75,000 crore, and if the present trend continues, their projected losses in 2014-15 will be 1.16 trillion, according to a study conducted by energy consulting company Mercados EMI Asiafor the 13th Finance Commission.

Fitch Ratings on Monday said that losses at state power utilities could threaten fiscal consolidation in five Indian states—Rajasthan, Tamil Nadu, Madhya Pradesh, Uttar Pradesh and Bihar.

“Losses in power distribution in these states exert additional pressure on state finances and it would be difficult for these states to achieve the fiscal consolidation targets established by the 13th Finance Commission," said Devendra Kumar Pant, director in Fitch’s international public finance team.


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