MUMBAI: The government’s ₹90,000 crore liquidity boosting plan for cash-starved electricity utilities has stalled as state governments hesitate to give guarantees.
Power Finance Corporation and its subsidiary REC Ltd, which are supposed to disburse the relief package to state-owned electricity distribution companies (discoms), have found that that state governments are reluctant to sign the dotted line on standing guaranteeing to loans and implementing the mandatory reforms.
"The (power) ministry has been clear that we must lend only if the state guarantees the loan," a senior executive at Power Finance Corporation (PFC) told Mint on condition of anonymity.
"We’re getting requests from several state-owned discoms on availing these loans. Uttar Pradesh’s discoms have asked for ₹21,000 crore in borrowings. But we will only disburse these amounts if the state governments sign a quadripartite agreement with the discoms and with PFC and REC guaranteeing these loans, recognising past dues and ensuring that our conditions for reforms are met. This is where many of the negotiations are stuck."
Among a series of announcements made last month as part of a stimulus package for a covid-battered economy, finance minister Nirmala Sitharaman had mandated that PFC and REC must extend ₹90,000 crore of special long-term transition loans for up to 10 years to discoms, subject to conditions, in two equal tranches.
Loans from the first tranche will require unconditional and irrevocable guarantee from state governments covering the loan amount plus interest and other charges. Loans from the second tranche will be conditional on loss reduction and performance improvement.
PFC and REC may offer a moratorium (only on principal) not exceeding three years, but interest will have to be serviced regularly. Interest rate will have a spread of up to 150 basis points over the cost of funds. (One basis point is one-hundredth of a percentage point.)
Over the past week, the power ministry has written to senior executives at PFC urging them to expedite the loans, one of the two officials that Mint spoke to said.
"The ministry’s letter said that discoms must draw these loans within two months or else the cost would go up by 50 basis points. Discoms - and their generators whom they need to pay - need this money now. There’s no point if these loans are taken six months or a year from now...But the ministry needs to push state governments as well, who have to agree to increasing tariffs to take the additional (loan) cost. But there is so much political posturing on electricity, it is slowing down the programme."
This won’t be the first time that state governments are taking on the debt burden of their electricity utilities. Most states and their discoms while joining the Ujwal DISCOM Assurance Yojana (UDAY) scheme launched in 2015 had agreed to achieve a number of milestones - reducing aggregate technical and commercial losses, increasing tariffs and implementing better metering systems. In most states - which are yet to be achieved. As a result, despite the transfer of a major portion of debt from the books of discoms to state governments under the UDAY programme, finances of several discoms have been weak, much before the covid-19 pandemic.
After the outbreak and the ensuing lockdown, collections from customers have bottomed, making a funding crisis among state discoms imminent.
"This package is a short-term measure for discoms," Girishkumar Kadam, vice-president, Corporate Sector Ratings, Icra, told Mint.
"It doesn’t address the fundamental issues that discoms face, However, they need to urgently clear their outstanding dues to generation companies, particularly in Andhra Pradesh, Telangana, Tamil Nadu and to some extent in Rajasthan. If discoms avail this loan, there will be an added interest burden which will further compound book losses. To compensate, they will have to increase tariffs."
For PFC, lending to discoms is risky business.
We are lending to them at a 150 basis points spread over our cost of borrowing of 7.7-7.8%, instead of our usual 250-270 basis points spread," the senior executive told Mint. “For a discom, that means funds are available at 9.3-9.5%. Most discoms will not be able to borrow money at such low rates. Liquidity in the market is tight now, and because REC is a subsidiary, it becomes harder to raise money in the market because of group exposure norms. We don’t get the same moratorium benefits that our borrowers have, because we borrow through bonds or in foreign markets. Taking these risks into consideration, we need the state governments to guarantee our exposure."