Discoms’ revival hit over inability to raise fresh working capital loans

By: and | Published: August 30, 2016 6:37 AM

Most lenders, bound by the Reserve Bank of India’s diktat against long-term working capital loans to stressed entities, are refusing to give the discoms fresh loans for day-to-day operations, sources from several discoms told FE.

It is crucial that the discoms meet their daily cash requirements to run operations,” a senior power ministry official told FE on condition of anonymity. (PTI)It is crucial that the discoms meet their daily cash requirements to run operations,” a senior power ministry official told FE on condition of anonymity. (PTI)

Most lenders, bound by the Reserve Bank of India’s diktat against long-term working capital loans to stressed entities, are refusing to give the discoms fresh loans for day-to-day operations, sources from several discoms told FE.

“After we received complaints from several states including Bihar, Uttar Pradesh and Karnataka (on the funds crunch), we have written to the RBI and the union finance ministry seeking their intervention to resolve the issue.

It is crucial that the discoms meet their daily cash requirements to run operations,” a senior power ministry official told FE on condition of anonymity.

An Uttar Pradesh Power Corporation official said: “Apart from PFC (Power Finance Corporation) and REC (Rural Electrification Corporation), no other lender is willing to provide us the working capital due to stringent RBI guidelines in this regard.”

The RBI had reportedly asked banks to desist from the practice of providing long-term (up to 10 years) working capital funds even to stressed entities.

The central bank said that additional financing in the form of working capital loans can only be for shorter terms like six to eight months if a firm has undergone loan restructuring. These guidelines apply to discoms also after they restructured loans under UDAY.

Additionally, the UDAY scheme itself lays down stringent conditions for working capital loans to loss-making discoms, if they fail to meet the scheme milestones.

The scheme, for instance, bars lenders from extending short-term loans if discoms participating in UDAY fail to break even by FY19.

After the government approved the discom revival scheme in November last year, 16 states — Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Jammu and Kashmir, Jharkhand, Haryana, Karnataka, Madhya Pradesh, Manipur, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand and Puducherry — have come on board.

Several of these states have taken over half of their discoms’ debt and issued bonds against it to the lenders as required under UDAY. They are required to issue bonds against a further 25% of discoms’ debt in the second year of the scheme.

Replying in the Lok Sabha, power minister Piyush Goyal had said that bonds worth Rs 1,66,754 crore had been issued by participating states under UDAY as on August 1, 2016.

The expected rate of interest on these bonds will be 8.75-9% versus the current rate of 13-15% on existing debt, which will result in interest cost savings of Rs 15,000 crore per year for discoms.

Additionally, according to the scheme, debt not taken over by the states shall be converted by the banks into loans or bonds with an interest rate not more than the bank’s base rate plus 0.1%.

Alternatively, this debt may be fully or partly issued by the discoms as state guaranteed bonds at the prevailing market rates, which would be equal to or less than the bank base rate plus 0.1%.

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