Liquidity Infusion for Discoms Through Rs. 900 Billion Loans, Positive for Power Gencos: ICRA

The Government of India under the Atmanirbhar Bharat package has announced a liquidity support of Rs. 900 billion for the state power distribution utilities (discoms), in the form of loans against receivables, from Power Financial Corporation (PFC) and Rural Electrification Corporation (REC). This is in response to the adverse impact of the lockdown imposed to control the COVID-19 pandemic on the revenues and cash collections of discoms. These loans are to be backed by state government guarantees and are to be used to clear the pending dues to power generating companies. The announcement is a much welcome measure.

Commenting on the liquidity infusion, Sabyasachi Majumdar, Group Head &Senior Vice President - Corporate ratings, ICRA Ltd says, “The liquidity infusion of Rs. 900 billion is a significant positive for the IPPs impacted by the long delays in receiving payments from discoms, with outstanding dues to power generation and transmission companies standing at around Rs. 940 billion. This is especially positive for renewable IPPs in the states of Andhra Pradesh, Rajasthan, Telangana and Tamil Nadu, which are reeling under pending dues of 8-12 months from these state discoms. This would enable the IPPs to lower their working capital interest burden in the near term and improve their liquidity and debt coverage position.”

The sanction of loans to discoms is linked to reforms in the state power sector such as promotion of digital payments from consumers, liquidation of outstanding dues from state governments and plan to reduce operational and financial losses by the discoms. Also, the central public-sector generation companies have been asked to provide rebate through waiver of fixed charges and transmission charges to the extent of power not drawn by the discoms, which is to be passed on to the final consumers by the discoms. The detailed guidelines are awaited from the Central Government on the linkage of the loans to the implementation of reforms by the state government and the discoms.

“From the discoms perspective, this liquidity relief scheme through loans would increase their overall interest cost, with estimated impact of ~9 paise per unit sold at all India level. However, the extent of impact would be higher for discoms in states like Andhra Pradesh, Karnataka, Jharkhand, Rajasthan, Telangana, Tamil Nadu and Uttar Pradesh, which account for more than 80% of the overdues to power generating companies. The ability of the discoms to pass on this interest cost through tariffs remains uncertain, given that this may not come under the normative working capital interest allowed by the regulators, while determining retail tariffs. This may result in increased dependence on state government support. As a result, the book loss levels for the discoms are likely to increase by Rs. 270 billion in FY2021 over FY2020, because of the impact of the lockdown on demand and revenues along with the additional interest cost on the Rs. 900 billion loans to augment liquidity position.” says Girishkumar Kadam, Sector head & Vice President - Corporate ratings, ICRA Ltd.

While this scheme for discoms is a short-term measure which would enable them to clear their pending dues towards the generation entities, the implementation of reforms by the state governments and discoms remains extremely crucial in the long run for achieving a sustainable improvement in discoms finances. These include timely filing of tariff petitions by discoms to enable timely issuance of tariff orders by the regulators, approval of adequate tariffs in relation to cost of supply, timely and adequate subsidy payments by the state governments and proactive efforts to reduce the distribution loss levels through measures such as installation of smart meters and augmentation of distribution infrastructure.