Bank guarantee burden to further bleed discoms

Last Updated: Mon, Jul 29, 2019 17:49 hrs
File photo of commuters walking past a bank sign along a road in New Delhi

New Delhi: Financial indiscipline is expected to put a burden of over Rs 3,500 crore on four state power distribution companies of Uttar Pradesh, Karnataka, Telangana and Tamil Nadu as these would now have to offer bank guarantee of that amount to the generators or face disruption in power supplies from August 1.

The Power Ministry through a June 28 order has made it mandatory for discoms to open and maintain letters of credit or LC equivalent to their monthly power-purchase bills as payment security mechanism with the generation companies or gencos.



The cut-off date for this is August 1, after which power companies will mandatorily snap supplies to state electricity distribution companies, or discoms, that fail to open or maintain bank guarantees.

The changes in regulations have been introduced to tame discoms that continue to delay in making payments to gencos even through the ongoing discom reform scheme UDAY has substantially cleaned up their books.

For gencos such as NTPC, Adani Power, this delay aggravates the problem as they are required to make upfront payments to Coal India Ltd (CIL) and the railways for supply of coal for power generation.

Sources said there is already a scramble for getting LCs among some discoms but there is still confusion over the tenure of such instrument as it would reflect on their financials. Several discoms are also looking at partial cover through bank guarantee as they are looking to use the services of state gencos to get uninterrupted power supply after the new regulations are implemented.


As per data available on the government portal for 'Payment Ratification and Analysis in Power Procurement for bringing in Transparency in Invoicing of generators' (PRAAPTI), the average monthly overdue of discoms towards generators in the two years through May 2019 was Rs 21,200 crore.

Some state discoms, such as those of Uttar Pradesh, Karnataka, Tamil Nadu and Telangana, are notorious for the delays that are equivalent to 3-5 months of the power-purchase cost to the Central and state gencos.

The average monthly billing of these state discoms is about Rs 3,500 crore and this is the amount for which would have to regularly maintain LCs to keep getting the power supply. This is expected to further put pressure on these discoms that have a total outstanding of a staggering Rs 20,000 crore.

The total outstanding of discoms to gencos is about Rs 42,000 crore. NTPC accounts for 61 per cent of overdues to central gencos and Adani Power - 26 per cent to private gencos.

If discoms are unable to maintain bank guarantee then they will be forced to undertake load-shedding when requisite generation is not available. But then, load-shedding or power cuts are going to be penalised, as the government is coming out with stringent norms to this effect.

"The LC mechanism will put additional financial burden on discoms in two ways. First, it will shorten the prolonged credit periods that discoms have enjoyed by deferring dues to generators, leading to a rise in working-capital requirement for their operations.

"Secondly, it will lead to increased financial charges for implementing regular LCs," Credit rating agency CRISIL has said in its research report on the new mechanism.

As per the agency estimates, additional working capital requirements (for meeting the changed norms) may lead to a further rise in interest burden of Rs 400-500 crore for the above-mentioned four state utilities and of Rs 2,500-3,000 crore across all state distribution utilities on an annual basis.

The CRISIL report has said that the government order on LCs leaves discoms with little option but to raise debt in the form of additional loans from commercial banks, issuance of commercial paper or get state support in terms of grants or early release of subsidies.

But getting state support will be difficult given that several of them are already reeling under high state fiscal deficits.

The gross fiscal deficit (GFD) for all of the four states given earlier A- Telangana (3.5%), Uttar Pradesh (3.0%), Karnataka (2.9%) and Tamil Nadu (2.8%) - is above the average GFD of 2.6%, lowering the probability of any significant or prompt support from the state governments.

If state support is unavailable, discoms will have to depend on bank borrowings to meet LC requirements, resulting in a further rise in debt and consequently, further increase in interest costs.

This may goad discoms to consumers for recovery, either through tariff hikes or creation of regulatory assets that enable recovery of carrying costs through tariffs in subsequent periods.

CRISIL report has said that if the NLDC or RLDCs reject power scheduling from inter-state generating stations, without the provision of LCs, discoms may continue to schedule power through central and state-generating units, and may instead refuse to open LCs against power procurement from private sources and/or opt for partial load-shedding.

That's because NTPC already has a similar payment-security mechanism in place, and is less likely to be affected by the order. Similarly, states have a substantial portion of installed capacity under state-generation arms
(which are currently under-utilised.

All state-owned plants were operating at an average 58% plant-load factor (PLF) in fiscal 2019), which may be ramped up to partially meet demand, enabling the state to not having to depend prominently on interstate sources.

Intra-state scheduling of power comes under state LDCs, which are not under the purview of the above order, as they are a part of state jurisdiction.

However, even after ramping up central and state sources, discoms may face average base energy shortage of 15-20% at the all-India level, which they will have to buy from private entities, CRISIL has said.

Further, ramping up of state and Central generating sources will be subject to various constraints such as coal availability, grid balancing requirements and merit order dispatches, and may compel discoms to depend on private power.

Subhash Narayan can be contacted at subhash.n@ians.in