Banks have started to pull the plug on working capital loans to cash-strapped power distribution utilities. Under watch are utilities that have previously defaulted on payments to generators or lenders, those repeatedly resorting to raising debt to cover past losses and utilities in States that have not bothered to regularly hike electricity tariffs. The move could spell fresh trouble for States such as Tamil Nadu, Uttar Pradesh, Rajasthan, Bihar, Haryana and Madhya Pradesh, as well as some private firms distributing electricity in Delhi.
Drying up of access to working capital loans from banks and institutions could further aggravate a liquidity crunch being faced by most of these utilities. This could cause serious disruptions in day-to-day power supplies as nearly all of these utilities are big buyers of short-term electricity – either through power traders or transaction on the power exchanges. Most of these spot market transactions have a short-term billing cycle and utilities resort to working capital loans to settle them.
“There have been payment defaults to central generation utilities by the two BSES firms in Delhi and state-owned utilities in Haryana. This practice of utilities borrowing regularly to settle current bills definitely has to stop, or there could be more defaults and serious repercussions on the banking sector,” an official with a state-owned lending agency said. The other brewing concern is on the availability of fuel – coal and gas – and its pricing, specifically in the context of whether distribution utilities can afford to pay for it.
According to a recent Fitch report, the biggest short-term buyers of power – utilities in Tamil Nadu and Rajasthan – face huge cash losses on a revenue and subsidy-realised basis. It estimates that Tamil Nadu and Rajasthan had taken recourse to debt mostly to cover their losses of Rs 32,000 crore and Rs 32,900 crore, respectively in March 2010. Industry players said Tamil Nadu has been falling back on payments to trading major PTC India Ltd.
Credit to the infrastructure sector in general, and the power sector in particular, has fuelled loan demand for banks and institutions over the past few years. Disbursals to the power sector are estimated to have risen close to 50 per cent between 2008-09 and 2010-11, more than double the 21 per cent rise in total bank credit in the period. This, going by the Planning Commission estimates, is even as the electricity distribution losses totalled a whopping Rs 70,000 crore in 2010-11.
A Crisil report has said over 10 per cent of the total loans of Rs 4.8 lakh crore to the power sector could be at risk by March 2013 unless reforms are carried out urgently. Besides banks, there are specialised lenders such as Power Finance Corporation and Rural Electrification Corporation, whose money is believed to be at risk.