The Hindu Business Line : REC offers floating rate loans for power utilities

The REC’s Chairman and Managing Director, Mr Anil Kumar Lakhina said, “We are prepared to advance floating rate loans, if the utilities so want them.”

Currently, REC’s loans are entirely on fixed rate basis, where the rates are reset every three years. The lending rates currently range from 11 per cent to 11.75 per cent and have undergone periodic revisions consistent with the REC’s own costs of borrowings.

REC already offers floating rate loans, though these are entirely short term, for a maximum of one year. The lending rates are at a spread of 250 basis points over the Mumbai Interbank Offered rate. For long-term loans, most utilities that have availed themselves of REC funds are at fixed rates that have undergone periodic hikes over the last two years.

These rate increases have hit generation and distribution companies adversely, especially for projects under execution. Most of these borrowers had initially contracted the loans when rates where 8 per cent. However, with rates now upwards of 11 per cent, tariffs from projects are likely to move up for both public and private sector projects. This is because interest costs are passing through items in power tariffs.

High rates

For distribution companies (DisCom), the high rates now implied increased their debt servicing costs. High interest costs are among the factors that have been pushed forward by distribution companies in Karnataka for seeking a revision in the expected revenue charges for the next financial year.

This was now likely to increase the deficits of the DisComs and inhibiting privatisation efforts by the State Governments, sources said, as valuations drop drastically.

But Mr Lakhina said, “We cannot lend at rates lower than our costs.” In fact, REC’s own cost of working funds has been on the rise. This was evident from the last few rounds of REC borrowings, that were all priced at 10 per cent plus. In 2003, REC had managed to raise funds at rates as low as 5.5 per cent.

State utilities have sought the funds at floating rates hoping to cover both their upside risks and benefit from any slides in interest rates. Some of the States have sought lending rates at spreads of the Treasury Bill rates. So far though, no floating rate loan has so far been drawn by any of the power utilities.

‘Mitigate impact’

Utilities want the floating rates so that impact on power tariffs could also be mitigated. But indications are that any offer of floating rate loans would be possible only if REC itself raised similar funds.

Most of REC’s borrowings are currently on fixed rate terms, or with five-year early exit options. Even if a switchover to floating rate does take place on project loans, state government officials said that there was unlikely to be any change in the lending agency’s covenants.

The covenants include assignment of revenues by borrowers, physical asset cover up to 150 per cent and sub-sovereign guarantees, where assets were owned by the state governments.

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