5 states face power cuts as Financial Institutions stop lending

Several financial institutions have decided to stop disbursing short-term loans to power distributors in five states where the losses of utilities have exceeded Rs 5,000 crore each, raising fears of prolonged blackouts and weaker electricity demand. The affected states are Tamil Nadu, Haryana, Rajasthan, Uttar Pradesh and Punjab.

Losses of state electricity boards are projected to double to Rs 150,000 crore by 2014-15, creating an alarming situation for the sector as these utilities are the vital link between producers and consumers.

A power ministry official said that while there have been no defaults yet, some distribution utilities have failed to pay installments on time causing concern to lenders like Oriental Bank of Commerce, Bank of Baroda, Corporation Bank and State Bank of India.

Tamil Nadu electricity distribution company, for instance, has asked lenders for more time to repay loans.

"We have discussed the issue internally. We want to highlight the issue so that the state governments release subsidies to distribution companies and allow them to raise tariffs," said an official at Rural Electrification Corp, a state-run company that lends to utilities. Power Finance Corp chairman and managing director Satnam Singh said his company has always been cautious in lending to distribution utilities.

The tough stance by lending institutions will further queer the pitch distributors as they would not be able to meet their working capital requirements. As it is, they are borrowing short-term loans at 14-15% to meet debt obligations, the ministry official said.

Weak finances are not allowing distribution utilities to purchase power which then resort to load shedding while electricity generators are not finding takers for their produce. Power tariffs in the short-term markets have also hit record lows over the last few months.
Out of the 54 distribution utilities analysed by Power Finance Corp, only 25 had audited accounts for 2009-10, eight have not finalised accounts while some of the utilities last audited their accounts in 2006-07.

Deloitte & Touche LLP senior director Subhranshu Patnaik said: "Distribution companies have been managing to get loans by mortgaging their assets or getting sovereign guarantees. The issue has come to a boil with the growing number of sick distribution companies."

Non-approval of expenses by state regulators on account of non-achievement of efficiency targets and lack of capital investments by utilities due to poor financial health has become a vicious cycle. This needs to be broken through appropriate interventions such as advancing efficiency improvement programs, he said.

In 2001, the state governments bailed out distribution companies out of Rs 45,000 crore debt.