Rs 90,000-crore discom package to increase leverage of PFC-REC: Moody’s

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Updated: May 23, 2020 7:46 PM

Moody's Investors Service estimates that though the Rs 90,000 loan for discoms carry low risk because of the state guarantees, it will increase the leverage of PFC and REC if they are booked as on-balance-sheet loans.

he agency expects PFC’s tangible common equity/tangible managed asset (TCE ratio) to fall by about 90 basis points if added to its balance sheet.The agency expects PFC’s tangible common equity/tangible managed asset (TCE ratio) to fall by about 90 basis points if added to its balance sheet.

Moody’s Investors Service estimates that though the Rs 90,000 loan for discoms carries low risk because of the state guarantees, it will increase the leverage of PFC and REC if they are booked as on-balance-sheet loans. The agency expects PFC’s tangible common equity/tangible managed asset (TCE ratio) to fall by about 90 basis points if added to its balance sheet. “This will weigh on PFC’s capital adequacy and leverage, which is already moderate because of the acquisition of REC,” analysts at Moody’s said.

Power sector lenders PFC and its subsidiary REC will use the loan amount allotted to state-run power distribution companies (discoms) to directly pay power generators (gencos) which owe money from these entities.

“This is positive to PFC and REC because the lenders have significant exposure to gencos, including privately owned gencos,” Moody’s noted. The consolidated non-performing assets of PFC were predominantly from privately owned gencos, accounting for about 8.3% of gross loan assets, or Rs 55,218 crore, as of the end of December 2019.

The loan injection was announced by finance minister Nirmala Sitharaman on May 13 to infuse liquidity into the electricity sector as a part of the Atmanirbhar Bharat package.

The fresh loans, backed by state government guarantee, would be done in two tranches of Rs 45,000 crore each, and the release of the first component to each state discom will be contingent on the respective state government undertaking to clear departmental dues to its discom in three years, and putting in place a credible mechanism to release the subsidies – meant for consumers but routed through the discoms – in advance.

To receive the second tranche of the package, discoms will have to furnish evidence of actions taken to implement the initial undertakings, which will include enabling digital payment of electricity bills. At the stage of release of the second tranche of Rs 45,000 crore, discoms will also have to come up with a plan, endorsed by the respective state governments, to reduce their losses.

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