Cabinet expands lending limits for power discoms to help them clear dues

Discoms can borrow only up to 25% of last year's working capital, under UDAY; This has now been relaxed for a one-time lending and would help discoms that have exhausted borrowing limits

The Cabinet Committee on Economic Affairs (CCEA) on Wednesday relaxed the borrowing limits for the state government-owned power distribution companies (discoms) as a one-time measure. This was done to assist power retailers to clear their dues to generation and transmission companies to help reduce stress in the sector.

Discoms can borrow only up to 25 per cent of their previous year’s working capital under the limits stipulated in the UDAY scheme. Borrowing were tied to discoms’ operational performance to ensure discipline.

The limit has now been relaxed for a one-time lending. This would help those discoms that have exhausted their borrowing limits.

“The liquidity of the power sector is not expected to improve in the short term, as economic activity and power demand will take some time to pick up. There is, thus, an immediate need to infuse liquidity in the power sector for continuation of power supply,” said a government statement.

Stretched portfolios

This could, however, further stretch the lending portfolios of PFC and REC, which have been under rating pressure from several agencies. Recently, S&P Global Ratings downgraded PFC to BB+ from BBB-, citing Covid-19 and weak macroeconomic outlook of Indian economy.

The power distribution segment accounts for 27 per cent of PFC’s total loan disbursement, while it is 44 per cent for REC. In April, both PFC and REC passed resolutions to not lend to any state that making financial losses and has high aggregate technical and commercial (AT&C) losses and have not filed for tariff revision. This has now been put on hold following the Atmanirbhar loan package.

The loan is part of the Atmanirbhar package announced in May to infuse liquidity into the power distribution sector. 

The discoms can claim one-time loan against their dues as of June, 2020. Till June, the total dues of discoms to gencos stood at Rs 1.13 trillion.

The size of the loan scheme proposed was Rs 90,000 crore and about Rs 68,000 crore has been sanctioned, said senior officials. PFC and REC will lend equally to discoms. The rate of interest is in the 8-10 per cent range, said a senior executive of the company. 

As the states that were breaching the UDAY limit have also been allowed to receive funds from PFC and REC, discoms of Tamil Nadu and Bihar would benefit from the relaxation. The states had sought loans of Rs 15,000 crore and Rs 3,524 crore, respectively, above their UDAY limit, said a senior official.

To avail of the loan, state governments would need to clear dues of their departments to the discoms and also give a guarantee to lenders. The discoms would also need to indicate a trajectory of loss reduction — both financial and operational.