In June, the Union power ministry directed state discoms to open LCs with their power suppliers, in an attempt to ensure that independent power developers get guaranteed payments.
In June, the Union power ministry directed state discoms to open LCs with their power suppliers, in an attempt to ensure that independent power developers get guaranteed payments.

Letter of credit system makes discoms fall in line on defaults, but problems remain

  • Between July and November 2019, outstanding dues rose by only 723 cr compared to 10,028 cr during the same period in 2018
  • The rate at which discoms are racking up unpaid bills has slowed down, though a heavy backlog remains

MUMBAI : A central government effort to instil payment discipline among power distribution companies (discoms) by mandating letters of credit (LCs) is showing signs of success, though the move has not helped clear past dues.

In June, the Union power ministry directed state discoms to open LCs with their power suppliers, in an attempt to ensure that independent power developers (IPPs) get guaranteed payments. If the discom defaults beyond the grace period provided in the power purchase agreement, the IPP is free to invoke the LC.

Some of the IPPs in India had unpaid dues of more than 12 months when the Centre brought in the move. The latest public data shows that the rate at which discoms are racking up unpaid bills has slowed down, though a massive backlog remains.

Outstanding dues of all discoms stand at 81,085 crore. However, between July 2019 (the month before LCs became mandatory) and November 2019 (for which the latest public data is available), outstanding dues rose by only 723 crore. In 2018, outstanding dues were up by 10,028 crore, from 45,806 crore in July to 55,834 crore in November.

However, developers say the system has not been implemented uniformly across states and some states have added their own conditions.

“We’re seeing high success rates with payments after the LC system was installed," said Ashok Khurana, director general, Association of Power Producers. “However, while the current bills are being paid, the problem is with the payments up to July 2019. This is what is creating a liquidity problem for IPPs. Even the data on Praapti (a government portal where data on outstanding dues is published) does not capture the full outstanding because there are late payment surcharges and change in law charges (when coal prices fluctuate or tax rates change). These lead to the outstanding increasing progressively," Khurana said.

The implementation of the LC system has been patchy, said a spokesperson for a New Delhi-based power generator said on condition of anonymity. “Some states we supply to, such as Gujarat, have opened LCs. Some others have issued LCs but with conditions that make enforcing them impossible. States such as Rajasthan, Telangana, and Andhra Pradesh have set conditions that we cannot encash the LCs without the discoms’ permission, which then makes the LC quite ineffective. However, in recent months, payments have improved," the spokesperson said. As discoms are only paying their most immediate dues, it has reduced the IPPs’ creditworthiness with lenders, said an executive at a private power company. “Banks lend money to IPPs against a six-month working capital requirement and, for this, they look at outstanding dues from discoms. Since the LC system was implemented, the discoms pay their current month’s dues while past dues remain unpaid. This means we can’t borrow money against the large backlog that the discoms still owe us. In December, the bank only considered dues that have arisen from June-November, of which dues from September onwards have been paid. So, for every month after the LC was introduced, our ability to raise working capital loans against outstanding dues has reduced," said the executive. A 30 December note from credit ratings agency Icra said LCs are more likely to be implemented for thermal power developers and not renewable energy (RE) developers. This is because discoms view thermal power as the base load and turn to RE for intermittent power supply, placing the latter lower on the pecking order, said Girishkumar Kadam, sector head and vice-president, corporate ratings, Icra.

RE projects having central nodal agencies and discoms in states such as Gujarat as off-takers are receiving payments on time, while projects having discoms in most of the other states as buyers are facing delays in payments. The payment timeline has seen significant deterioration for wind IPPs in Andhra Pradesh and Telangana, mostly, with delays of over a year.

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