Power distribution companies using bank loans to fund their recurring losses might find this door shut soon, with the Reserve Bank of India (RBI) agreeing to the Union power ministry?s proposal to tighten lending norms for discoms.

Sources told FE that according to these norms, lending will be linked to the implementation of key power reforms in states and made applicable to banks and non-banking finance companies alike. As of now, there are no guidelines in place for lending to discoms.

Banks are comfortable lending to discoms even without conducting proper due diligence, as they do not see any risk of these state government-guaranteed loans going sour. Taking advantage of this, discoms have been borrowing heavily to fund their losses resulting mainly from non-revision of tariffs. Consequently, outstanding bank loans to discoms have reached R1.53 lakh crore, while discoms? losses as of March 2010 are projected at R74,000 crore.

?We are formulating a common lending mechanism for discoms. The idea is to prevent discoms from funding their losses with bank loans and put pressure for tariff revision,? a senior official in the power ministry told FE.

Following the RBI?s go-ahead, the power ministry has started formulating eligibility criteria for lending to discoms with the help of the Power Finance Corporation, the largest lender to the power sector.

?Timely revision of tariff, payment of outstanding and current agriculture subsidy and settlement of electricity dues by state government departments are likely to become key eligibility criteria for discoms to access bank loans,? the official said.

?RBI officials have met public sector banks to discuss loans to the power sector, especially state electricity boards (SEBs) and distribution companies,? said the CMD of a public sector bank.

?The central bank has suggested that banks remain cautious in granting working capital loans to companies in the power sector. This is due to the expectation that bad loans may rise in the sector, as loans given to SEBs could become non-performing,? the CMD said.

He, however, said there was no direction as far as working capital loans to other sectors are concerned. ?We are already pursuing prudential guidelines with regard to granting working capital loans. The concern relates only to the power sector, where discussions are going on with companies and the banking regulator to ensure that loans do not turn bad,? he said.

States like Uttar Pradesh, Rajasthan, Madhya Pradesh and Tamil Nadu have already approached the Centre for bailout packages for their discoms reeling under unmanageable debt burden.

Mounting discom debt has alarmed the Centre, prompting it to consider out-of-the box measures to put pressure on states on expedite reforms. The power ministry recently asked the finance ministry to count discom losses in states? fiscal deficit. It has also moved the apex electricity regulator, Appellate Tribunal for Electricity, seeking direction to state electricity regulatory commissions to provide information on how they are using their powers relating to tariff revision.