RBI can use Centre's state transfers for discom defaults: CEA panel

The report recommended a trade receivable discounting system for ensuring timely payments to power generating companies

A committee of the Central Electricity Authority (CEA) has suggested that an agreement between the Reserve Bank of India (RBI), the state government concerned and participating banks be developed. In case of default by a power distribution company, the RBI could appropriate the dues from the resources to be transferred from the Centre to the state concerned.

In its recommendations to the Union power ministry, the report recommended a trade receivable discounting system for ensuring timely payments to power generating company. It could mean creating a discounting platform similar to what is there for micro, small and medium enterprises.

The report has also chalked out a bill discounting system where the bill generated by the supplier is bid for by a financier after it has been accepted by the distribution companies. After the bid is accepted, the financier makes the payment directly to the power supplier. The buyer or the distribution company later makes the payment to the financier. The report, however, admits that such a mechanism may not be acceptable to the banks so RBI could be made a party.

The report also pointed out that in the current macro environment, most of the power generating companies are facing severe cash flow mismatches because of huge pending receivables from discoms. “To alleviate such cash flow stress, it would be prudent if a usance letter of credit is considered by coal companies for payment purposes. Such letters of credit provide a credit period say of 180 days.” 

As the first step towards this, the buyer which is the generating company will request the issuing bank a usance letter of credit for 180 days. On scrutiny of documents, bank will issue a usance letter of credit in favour of the advising bank.

After the issuance of the letter of credit, the advising bank will advise the seller which is the coal company which in turn will dispatch the goods to buyer (generating company) in accordance with set terms.

After the dispatch of goods, seller or the coal company will submit the dispatch documents to the advising bank, which will forward the dispatch documents to the letter of credit issuing bank. This bank will present dispatch document to the buyer or the generating company. The bank will do the scrutiny of documents and convey the acceptance to the advising bank.

After the confirmation from the letter of credit issuing bank to the advising bank, proceeds will be credited to the coal company account by the advising bank. The advising bank will request the LC issuing bank for payment at maturity.