Banks told to be more prudent while lending to power distribution utilities

Mr B.K. Chaturvedi, member, Planning Commission, said banks should apply stricter prudence while lending to financially weak power distribution utilities (discoms) controlled by State Governments.

The Planning Commission member also advised the State Governments resisting tariff revision to directly subsidise the discoms for revenue loss.

Discoms are losing an estimated Rs 75,000 crore a year due to low tariffs and are using bank loans to mitigate the widening cash shortfall.

Talking to Business Line on the sidelines of a seminar organised by the Confederation of Indian Industry on Friday, Mr Chaturvedi said: “There has to be prudence in (bank) lending (to discoms).” However, a “balance” should be maintained between lending and the cash requirements of utilities, he added.

The commission has appointed a high-powered committee headed by the former Comptroller and Auditor-General of India, Mr V.K. Shunglu, to review the financial health of discoms. According to Mr Chaturvedi, the report is expected in end-September.

It is estimated that discoms have borrowed nearly Rs 1,50,000 crore from banks — mostly as short-term-loans — during the last two to three years to mitigate the cash shortfall on account of lower tariff realisation.

The loans were extended without any Government guarantee and, in cases, were far in excess of the net worth of the respective utilities. It is understood that even long-term loans for project finance were diverted to meet the widening cash shortfall.

PPP in Distribution

According to him, major investments were required in the transmission and distribution segments in the coming days.

The Planning Commission has formed a 10-member committee headed by Mr Chaturvedi to report on the need for public-private partnership (PPP) in power distribution.

The decision to look at the private-public partnership model was taken following the shortcomings in the franchise model. The franchise model — currently opted for in most parts of the country — suffers from legal issues that restrict the purchase of power by the franchises.

“Our plan will be to clear legal issues. However, it will be for the respective State Governments to decide on the model they want to adopt,” Mr Chaturvedi said.