Follow prudential norms when lending to discoms: Power Secy tells SBI

Power Secretary Alok Kumar says overall debt of the discoms at the end of FY20 was Rs 5.14 trillion, against a turnover of Rs 7.28 trillion

The Union Ministry of Power has pressed upon country’s leading bank, the State Bank of India, to follow the prudential norms while lending to the state-owned power distribution companies (discoms) that are in a financially beleaguered condition. The ministry had earlier urged the central banker Reserve Bank of India (RBI) to direct the public sector banks to follow strict norms while lending to the discoms.

The primary lenders to the discoms--state-owned NBFCs Power Finance Corporation and Rural Electrification Corporation (REC)--already follow the norms.

Power Secretary Alok Kumar in his letter has said, many discoms are facing solvency and liquidity issues and the debt level of discoms has been rising every year. According to his letter, as reviewed by Business Standard, the overall debt of the discoms at the end of FY20 was Rs 5.14 trillion, against a turnover of Rs 7.28 trillion.

“A burgeoning debt and outstanding payables of the discoms to their creditors which are predominantly gencos and transcos is a matter of concern. This poses a challenge to the viability of the power sector, while also adds to the concerns to the stability of the financial sector. Even if most of the loans to discoms are given against state guarantees, the present trend of increasing unpaid government dues and subsidy arrears will make repayment of debt non-feasible in case of defaults,” the letter said.

He further said the banks also need to respond to these challenges and adhere to the prudential norms. The norms entail that the banks should lend to only those discoms which meet 10-point eligibility criteria. The criteria includes discoms should have latest audited accounts and timely filing of tariff petition. The said discoms should also follow a system of providing electricity subsidy. There should not be any dues from the state government departments to the discoms. The discom should not be defaulting on any loan to any bank or financial institution and its working capital shall be restricted to 25 per cent of total revenue. If the discom is loss making, it should be adhering to the trajectory of reduction in AT&C losses (commercial loss) and reduction of cost-revenue gap.

The union ministry has urged the SBI to implement the prudential norms “mandatorily” for lending to the state-owned discoms.

State-owned discoms across the country and financially and operationally beleaguered despite four reform schemes in the last 15 years. The earlier discom reform scheme UDAY concluded in FY20 with most of the states failing to meet their stipulated targets and still in red.

The Centre this year announced a new 'Reforms-based and Results-linked, Revamped Distribution Sector Scheme'. The new scheme seeks to improve the operational efficiencies and financial sustainability of all discoms/power departments (excluding private sector discoms) by providing conditional financial assistance to discoms for strengthening of supply infrastructure.