New Delhi: Rising defaults on payments by power utilities are threatening to hurt the revenue of state-owned Coal India Ltd (CIL), said three people aware of the development.

Total defaults on the world’s largest coal miner stood at around 2,500 crore on 30 September. On a consolidated basis, CIL clocked a net profit of 10,867 crore on total revenue of 50,233 crore in the year ended 31 March.

“Most of CIL’s customers are defaulting," a person aware of the development said, requesting anonymity.

“There is an increasing trend of defaults. Users of A and B grade of coal, which are premium grades of coking coal, are deferring payments," said a CIL executive. This was confirmed by another company official. Both declined to be identified.

This comes at a time when the country’s power sector is facing a crisis due to a coal shortage on faltering production. In what could be the worst case of coal shortage faced by India’s power sector, 41 thermal projects have less than a week’s coal reserves to support power generation and 28 projects have less than four days’ stock.

Brent Lewin/Bloomberg

Some of the biggest defaulters are the state utilities of West Bengal, Bihar and Jharkhand, which together account for over half the amount. In addition, NTPC Ltd, India’s largest power producer, and Damodar Valley Corp. have also defaulted on payments.

CIL chairman N.C. Jha and coal secretary Alok Perti didn’t respond to repeated phone calls and emailed queries.

“What CIL is terming as default is the money deducted for supplying stones," an NTPC executive said, requesting anonymity. “We haven’t paid the amount as we didn’t get the quality of coal that we had purchased."

“The power companies turn back and say even they have a problem with their clients who default. There nothing much the company can do but keep sending reminders," said one of the CIL executives. “We haven’t stopped supplying coal to the defaulters owing to our social obligation."

State electricity boards across India are saddled with losses due to power theft during transmission and distribution, billing inefficiencies, and, more importantly, because they have to buy expensive power to tide over short-term deficits.

“The financial health of state power utilities…has deteriorated with aggregate annual book losses widening to 295 billion in FY10 from 70 billion in FY06, leading to an increase in the counterparty risk," rating agency Fitch Inc. said in a recent report,

“The risk to these (power sector) lenders arises primarily from potential weakening in their asset quality due to two critical issues: escalating losses and debt levels in the power distribution sector, and the shortage of fuel for power generation," said a report by credit rating firm Crisil Ltd.

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

Power companies have also been hit hard by rising coal prices during much of the last 12 months, owing to bigger demand from countries such as China and India with growing economies and supply disruptions in producing countries such as Australia, where floods brought down coal production. CIL was also hit by floods in eastern India followed by strike threats by unions that affected production.

CIL mined only 431 million tonnes (mt) in 2010-11 against a target of 461.5 mt because of stalled projects. While its target in the current fiscal year is 452 mt, incessant rains during the July-September period and a strike by its workers has affected production.

Also, difficulties in setting up new mines because of regulatory, environmental and social hurdles have slowed output growth.

“In volumes, they won’t be able to meet targets. If they raise prices, they might be able to make up on earnings a bit," said Arun Kejriwal, director, of Mumbai-based equity research firm KRIS. “The e-auction route, by which the company sells coal at market prices, has been helping the company offset losses on account of low growth and low productivity."

“They are the monopoly producers. Looking at the coal shortages and the difficulties in importing coal and also the higher international coal prices, coal buyers will have no choice but to pay the price Coal India sets," Kejriwal said.

While CIL last week managed to avert a strike by accepting demands of higher bonuses from powerful worker unions, Kejriwal said the company’s coal production target of 452 mt for the current fiscal looked difficult to achieve, especially if unions call for strikes again after Diwali on Wednesday.

The power sector is the biggest consumer of coal in the country, absorbing 78% of total domestic production. To generate 1 megawatt of power, around 5,000 tonnes of coal is required every year.

Coal demand in the country is around 600 million tonnes per annum (mtpa) and is set to touch 2,340 mtpa by 2030. India has a known coal resource base of 264,000 mt, the fourth largest in the world, of which proven reserves are around 101,000 mt.