5 Reasons Discoms Should Consider This For Financial Distress

That a financial crisis is pretty much  business as usual for discoms in India has been well documented on this site, and elsewhere. Many solutions have also been suggested, most of which seem to fall short of actually settling the matter. So here is one we would like to suggest, without quite getting into the really finer details. The good news, it’s been tried already. The bad news? As always, there is very little information available on how successfully it worked. PSPCL claims Rs 35 crores came in. Is that good, or poor? So what are we suggesting?

This. An advance deposit scheme of the sort PSPCL implemented doesn’t even have to offer the sort of interest rate they offered. In fact, in these times, consumers would be well advised to take a second, and possibly even a third look at any entity or person offering you a 12 percent rate of interest. But if your discom was to offer a return of say, 8 percent? We bet you would take a harder look at it. So why could this help? 5 good reasons.

a) For one, discom after discom has announced that the crisis on collections is so bad that they are struggling to pay salaries. Most have asked for state backed guarantees to take more loans. These loans, including loans from the Rs 90,000 crores stimulus announced by the government come at 9.5%. And some discoms might find meeting all conditions a bridge too far so quickly. Hence, a controlled advance deposit scheme, guaranteed by the government will allow them to push down their cost of funds even further. Interestingly, if one considers the view that only the ‘rich’ will be able to afford placing advance deposits, then this is still a better way to subsidise the poorer consumers (throw a lower cost of funding for the discom), in a way funded by the ‘richer’ consumers. PSPCL, which offered 12 percent, actually justified it by stating that it is the rate it has to pay as a late payment surcharge for delaying its payments, which can now be paid to consumers who would get almost double the interest being offered for fixed deposits.

b) Few alternatives generating those returns. For senior citizens and more. It is no secret that the relentless push back on deposit interest rates has hurt savers the most. And among savers, senior citizens have been left hapless, other than the privileged few on government pensions. A one year deposit with your local discom, however financially poor its books, will not be a bad option when one considers the fact that electricity is going to be consumed irrespective, and the government is duty bound to ensure a discom doesn’t die on its consumers. Then why not seek this simple yet efficient cost reduction. Importantly, raising the money is no longer a complicated exercise, as virtually every discom offers online payments today. Through multiple banking and wallet partners. Enabling an advance deposit option through the same partners can’t be too difficult.

c) A rise on domestic savings, caused by the lockdown, and lack of spending avenues. Savings rate has already gone up due to enforced halt on consumption caused by lockdowns. Our banking system, which is usually expected to channel these savings in a productive way, is a proven dud. This has amply been demonstrated by the the way our banks have rushed to bank the increased money released by the RBI with the RBI, to earn their 4 percent on it, rather than take the risk of lending it out. Channeling at least some of these savings towards discoms, again not a bad idea?

d) Retail deposits= More Closer Tracking. There is nothing quite like retail deposit taking to ensure better monitoring and reporting of institutions. And that goes for discoms too. The media, which usually gives a wide berth to discoms and the reasons behind their financial woes, will probably track them much more once they take retail deposits. Not to mention the people running the discoms. Discoms are in deep trouble for many reasons, not least of which is their relative anonymity, even as the media and people have focused attention on power generating firms. This writer still remembers court cases where judges would take a sterner view of defaults for example, if the lending firm had taken public deposits! Could this change their attitude to power thieves? Who knows? Could this actually lead to an improvement in performance? That’s probably wishful thinking, but it is difficult to imagine things could get worse.

e) Here are the depositors. Besides the obvious middle class, high net worth consumers, there are enough institutions  that will readily embrace the scheme, one imagines. Including the very same banks that refuse to let go of their money for any productive lending.

Legally, the companies act clearly allows deposits that are treated as an advance for services or goods, for a maximum period of one year. Which explains how some discoms like BSES Rajdhani  pay you an interest credit at the end of the financial year on your registration deposit, without quite showing the advance as a fixed deposit at all. Of course, for tenures beyond one year, many changes will need to be made.

So unless you plan to be atmanirbhar regarding your electricity, chances are, an 8 percent return on your advance with your discom would really interest you. No?  If you disagree, or have many better options to get the same or better return, do share those with us.We are listening!