Power utilities to get funds based on new rating system

In an attempt to streamline lending to power distribution companies and improve their performance, India for the first time is planning a mandatory rating system for 65 state-owned distribution firms.

Power utilities in the country face aggregate transmission and commercial losses of around 30% due to unmetered and unaccounted use—the highest in the world. Combined annual losses of all state electricity boards (SEBs) add up to around 1% of India’s gross domestic product.

Once the government assigns ratings to SEBs, they will form the basis on which state-controlled banks and financial institutions will lend to them. If a utility is highly rated, it will be eligible for more funds at a lower rate of interest. The rating exercise is expected to be completed in six months and the first meeting on the matter has been held by power secretary P. Uma Shankar.

“We will decide the parameters and will hold discussions with various stakeholders,” Shankar said. “Post the rating, the distribution utilities will be put in different categories. The ones who are in higher category will be eligible for larger quantum of lending at a lower rate of interest.”

“Such a system will bring about financial improvement,” Shankar added.

Most SEBs make substantial losses and are either not able to raise money or can do so only at high rates of interest. A dependence on subsidies and the political compulsion of providing free power to farmers reflects poorly on the books of these state-owned boards, which together have accumulated losses approaching R

s.

2.5 trillion.

The health of the Indian power sector is linked to the financial condition of distribution utilities, given the fact that they are responsible for the power offtake from generation firms such as NTPC Ltd. There is growing concern about investing in the power generation sector due to the poor financials of SEBs.

“The prerequisite is that all the institutions should implement it in one go and should stick to it,” said Satnam Singh, chairman and managing director, Power Finance Corp. Ltd (PFC).

Currently companies such as PFC and Rural Electrification Corp. Ltd (REC) lend money to the utilities based on their own internal assessment systems.

State-owned PFC and REC together account for 60% of the money lent to power companies in India. They loan money to develop new power projects and finance restructuring of power distribution utilities.