India’s power bailout depends on states clearing utility dues

Indian states, which want to tap $11.9 billion of credit offered by the federal government, must plan first how to pay ₹1.17 trillion ($15.5 billion) of outstanding bills, according to people with knowledge of the matter.

The provinces planning to avail the program need to provide a timeline for payment of pending power bills and subsidies. Failure to comply will result in penal interest charges on the loan being offered by state lenders Power Finance Corp. Ltd. and its unit REC Ltd., the people said, asking not to be identified citing rules. The states will also have to guarantee the loan amount and interest payments.

The move was announced as part of Prime Minister Narendra Modi’s pledge to spend 10% of gross domestic product to revive an economy that is staring at its first contraction in four decades due to the world’s most stringent stay-at-home rules. The 900 billion rupee package is key to easing the liquidity challenge that confronts the coal and power industry, after measures taken to check the spread of coronavirus caused a sharp drop in power demand.

Yet, extending loans to these financially weak utilities is a risky bet for the lenders, who are drawing comfort from state government guarantees and an agreement for payment of power retailers’ dues. Spokesmen at the power ministry, Power Finance and REC didn’t immediately respond to emailed requests for comment sent outside office hours.

Cashflows have been reduced to a trickle as demand stalled from high-paying industrial consumers, apart from lower revenue collections. As economic activity slowly rebounds, companies from generators to coal miners and truckers are counting on it to revive operations.

State government and their utilities need to submit a plan for reducing power theft, improving revenues as well as timely payment of bills by government departments, the people said. In case of a failure to stick to the timeline for dues repayment, Power Finance and REC will levy an additional 25 basis point interest. These eligibility terms have been sent to the utilities.

The loans will be disbursed in two tranches and will have a tenor of maximum 10 years with a three year moratorium on principal payments. Power Finance and REC will divide the ₹900 billion advance equally between them.