Association of Power Producers Request Financial Support From Finance Minister

The Association of Power Producers recently wrote to the Minister of Finance highlighting the concerns of power debtors and extended litigations that have been egging the power sector

The Association of Power Producers (APP) recently wrote to Minister of Finance, Nirmala Sitharaman, highlighting the concerns of power debtors and extended litigations that have been egging the power sector. The letter titled, ‘Request for key financial support required for revival of the infrastructure industry’, laid out the major issues pressing the sector and suggestions for its solutions.

At the foremost, it brought forward one of the biggest challenges afflicting the power companies, the large overdue of receivables pending over long time, including regulatory dues. It spoke at length on how the recovery of such dues is inordinately delayed due to multiple litigations by the Discoms as a strategy to delay their payment obligation. Orders issued by regulatory forums are challenged as a matter of routine and honouring directions for interim payment issued by regulatory commissions are rare; even such orders from appellate tribunals are not adhered to in many cases and mostly end only at Supreme Court.

It then went on to suggest that a mechanism or policy framework be formulated, in lines of MSME Act and Consumer Dispute Resolution Act, wherein at least 75 percent of the claim amount has to be paid by any party in order to file an appeal challenging the orders of regulatory commissions. The amount can be adjusted in the future once the final judgment from higher courts is given.

A few other issues shared in the letter:

On Tap Targeted Long Term-Repo Operations (TLTRO): 

RBI infused liquidity of Rs ~2.5 lacs crore. through Banks under TLTRO mechanism. It also allowed this facility to be exempted under the large exposure framework. However, Banks have restricted their funding to few Corporates with High Rating (AAA & above) or to sector specific industries primarily excluding the power sector. Considering the severe liquidity shortfall affecting the power sector value chain, Govt of India had earlier announced a Rs 90,000 crore liquidity infusion package to the States to pay their dues, which was subsequently hiked to Rs 120,000 crore. However, only around Rs 31,000 crore has been disbursed to the States to date whereas, on the other hand, the current overdue amount to generators has increased to approximately 1.25 Lakh crores as of September 2020.  

Suggestion: APP requested GoI/RBI to undertake a specific TLTRO tranche of Rs 1,00,000 crore focused on Infrastructure Companies with minimum investment grade rating to help power sector companies meet their capex requirement for setting up new projects in the renewable sector, for the environmental emission control equipment and for their working capital needs.

Incentivising Banks to lend to the Infrastructure Sector: 

Stringent criteria of defining stress (like one-day delay in meeting debt servicing obligation which includes monthly interest) is not suitable for assessing loan quality of powers sector assets, considering the ecosystem in which it operates and the long life of such projects. Such criterion makes it difficult for banks to fund power sector investments making banks reluctant to fund the investment. The power sector needs investments of around Rs 50,000 crore to meet the new environment rules for coal-based power plants for the remaining 120 GW of power plants which are yet to place FGD equipment orders.

Suggestion:  GoI can consider lowering of Risk Weights for Calculations of Capital Charge for Credit Risks from 100 percent to 50 percent in case of infrastructure loans & advances, giving tax breaks on Net Interest Margin (NIM) on infrastructure loans & advances and incentivising banks to lend to Infrastructure companies through interest subvention.  

Also to incentivise local manufacturers like BHEL, L&T and implement ‘Atmanirbhar Bharat’ in the power sector, GoI may provide an interest subvention scheme for local manufacturers as this will help the banks to lend to such companies to revive local manufacturing which has been subdued over the last few years due to low demand from the power sector.