The Ministry of Power is supposedly working on a plan to use central government-owned financial institutions (FIs) including Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Indian Renewable Energy Development Agency (IREDA) to fund DISCOMs in wake of the Coronavirus disruption. As per news reports, funds would be provided to DISCOMs at concessional cost specifically for clearing dues to the power producers. It is not yet clear what conditions may be attached to such a funding package.
- Banks and other lenders are steadily withdrawing from the power sector leaving government-owned FIs as lenders of last resort;
- Another bailout is a missed opportunity for driving tough reforms in the distribution market;
- It portends a continuing cycle of financial insolvency and risks such as PPA renegotiation, delayed payments, cancelled auctions, curtailment and policy instability;
DISCOM dues had crossed INR 900 billion (USD 12 billion) before the Coronavirus-related lockdown. Subsequent economic slowdown and reduction in power demand are expected to increase their funding shortfall by about INR 200 billion (USD 2.7 billion) for every month of the slowdown. The situation is reaching a crisis point and it is disappointing that after several years of policy deliberation, the government believes that there is no option other than another financial bailout of the DISCOMs. It is a missed opportunity for driving a hard reform package and sending a tough message to the DISCOMs and state governments.
It is not a surprise that the government-owned FIs are becoming lenders of last resort to the sector as banks, other institutions and NBFCs slowly withdraw. Recently, MNRE allowed developers to provide letters of comfort from the same government FIs instead of bank-issued performance guarantees and earnest money deposits. Our research into sector lending data shows some stark trends. While banks have been steadily cutting back their exposure to the sector, the government FI loan book has grown by more than 50% in the last five years to INR 6 trillion (USD 81 billion). Share of these FIs in new lending to renewables is estimated to have reached an unprecedented 84% in FY 2019.
188807
Figure: Total lending exposure of government FIs and banks to the power sector, INR billion
Source: Reserve Bank of India, annual reports of PFC, REC, IREDA, and BRIDGE TO INDIA research
Figure: Total new lending to renewable energy sector, INR billion
Source: Annual reports of PFC, REC, IREDA, and BRIDGE TO INDIA research
Failure to attract private commercial capital is an indictment of prevailing risk framework in the sector. While most analysts and developers have rejoiced at the prospect of the bailout, we believe that it sends a terrible message. It is a signal to private investors and lenders to not expect a sector structured around commercially sound principles. It portends a continuing cycle of financial insolvency, bailouts and ensuing risks related to PPA renegotiation, delayed payments, cancelled auctions, curtailment and policy instability.
