Loss-making discoms a drag on states' finances: RBI

State-owned power distribution firms' overall losses stood at Rs 1.9 lakh crore till March 2011

The RBI today said loss-making power distribution companies continue to impact financials of states and cautioned against their restructured debt liabilities turning into non-performing assets for the state governments.

Pitching for periodic tariff revisions, the central bank said losses of discoms have also raised "serious concerns" for banks and financial institutions.

Faced with mounting debts of state-owned discoms (power distribution firms), whose overall losses stood at Rs 1.9 lakh crore till March 2011, the Union Power Ministry has come up with a debt rejig scheme, where one of the conditions is that 50% of short term liabilities are taken over by respective state governments.

"Strict enforceability of conditions associated with the restructuring package has to be ensured so that ... Financial stability in the economy is not threatened by the restructured loans turning into non-performing assets," RBI said.

In its annual report 'State Finances: A Study of Budgets of 2012-13' released today, RBI said financial losses of state power discoms continue to act as a "drag on finances of states".

RBI said non-revision of tariffs, subsidy arrears, high cost of buying short-term power and high distribution losses are among key reasons for financial ill health of discoms.

"As the discoms have largely availed of short-term borrowings from banks and financial institutions to cover cash losses, it has raised serious concern not only for the discoms but also for the banks/financial institutions that have lent to them," the apex bank said.

State governments support discoms through various direct and indirect channels. These include subsidies and grants  in lieu of subsidised power provided to certain categories such as agricultural and domestic consumers.

The central bank emphasised that turnaround plan for discoms can be successful only if certain conditions such as "elimination of the gap between average revenue realised and average cost of supply as early as possible through periodic tariff revisions" are in place.

Late last year, the Power Ministry had notified financial restructuring scheme for discoms that includes converting 50% of their short-term debt into bonds backed by states.

"The restructuring/re-scheduling of loan is to be accompanied by concrete and measurable action by the discoms/ states to improve the operational performance of the distribution utilities," the ministry had said.

Besides, the government is working on a State Electricity Distribution Responsibility bill, which would have stringent norms to ensure good performance of discoms.

The RBI today said the restructuring scheme, if implemented in the right spirit, "may get rid of one of the most daunting problems of state finances by turning state discoms into financially viable units".