An SPV to buy bad debts of discoms

RBI would provide a line of credit to the SPV; state govts would have to repay the loans.

The Shunglu Committee, which was looking into the financial health of power distribution companies, has suggested setting up a special purpose vehicle (SPV) as a corporate entity to buy out distressed debts of banks to ailing discoms.

The Reserve Bank of India (RBI) would provide a line of credit to the SPV for buying the bad loans. In the long run, state governments would have to repay the loans to the SPV. This means there would be no write-off of the outstanding loans, according to the report submitted on Thursday. The period of repayment, though, may increase in this case.

However, buying out the loans of discoms from banks would depend on various conditions, including state governments’ agreements for a regular tariff increase, a plan to meet technical and operational performance parameters, an agreement between the state government and banks regarding interest rates, the period of repayment and the amount of repayment.

The discoms would also be asked to undertake capital expenditure, since this would generate additional income, as a precondition to set up the SPV. In case of non-compliance of the terms of the SPV, state governments would have to give an undertaking to RBI that the amount defaulted would be debited to the state government accounts with RBI, the report added.

The financial condition of power distribution companies is gloomy, as these are not able to recover their cost of operation, owing to the mismatch in costs and tariffs. There has been no substantial increase in power tariffs in the last five or six years. Though this may have helped consumers, it led to distribution companies recording losses.

The report also said RBI would appoint a chief executive of the SPV. The central bank would account for 76 per cent of the share capital, while the rest of the capital would be held by the two state-run power lenders — Power Finance Corporation and Rural Electrification Corporation, as suggested by the report.

The Shunglu Committee was set up after considering the financial condition of discoms, which had outstanding loans, both short-term and long-term, of Rs 177,602 crore as on March 31, 2010. The discoms incurred an accumulated loss of about Rs 75,000 crore in 2008-09, which rose to Rs 106,347 crore in 2009-10, according to power ministry estimates.

Earlier, it was expected distribution utilities would suffer a loss of over Rs 1.16 lakh crore by 2014-15. However, it is now believed the loss would rise further if necessary steps are not taken immediately.

The accumulated losses are on the rise, despite a downward trend in aggregate technical and commercial losses. Apart from the tariff mismatch, another factor that contributed to the high loss was the inadequate subsidy given to the discoms by state governments.