• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Shivkumar

Presently, REC base lending rates start from 8 per cent. Despite the reduced rates, the sources said, REC would still stand to benefit in the form of an enlarged asset base.

Bangalore , Aug. 8

THE Central Government-owned power sector financier, Rural Electrification Corporation Ltd (REC), has offered to take over some of the high-interest loans of the State power utilities in a bid to push up its asset base.

A handful of States has already taken advantage of the REC and had submitted applications. Mr Rakesh K. Arora, REC's Joint chief, Finance and Accounts, confirmed this. However, he added, "The applications are being considered by the REC board." But sources said here that among the applicants were southern States.

The takeout financing arrangement would involve foreclosure of the existing high-interest loans of other lenders to the State Government electricity utilities and refinance of the same by the REC. States have been looking for alternatives of funding their electricity sector in a bid to reduce the financing costs and to eliminate the need to resort to continuous tariff hikes. "If the financing costs are reduced, States would not find the need to hike tariffs or the quantum of tariff increases could be kept low." The sources said that States, which were examining the need for obviating tariff hikes, were the ones who had jumped at REC's offer.

However, the takeover offer would not imply any major change in the lending covenants either in the physical asset or in the payment security mechanism. REC would continue to insist on a physical asset cover ratio of 150 per cent of the loan value, a default escrow account and a State Government guarantee. Above all, borrowing entities would have to conform to the stipulated debt service coverage ratio (DSCR) norms.

The DSCR norms applicable to commercial funding is that the net cash flows would have to be at least 1.5 times the debt service payment. This ratio indicates the borrower's debt carrying capacity. The sources said that borrowers failing to meet these criteria would have to provide credit enhancements, which could include State Government guarantees or take the form of assignment of receivables from the designated revenue circles. The applicant States, which include Andhra Pradesh, the sources said, have indicated that they were prepared to comply with these conditions.

Presently, REC's base lending rates start from 8 per cent. Despite the reduced rates, the sources said, REC would still stand to benefit in the form of an enlarged asset base. Besides, the spreads for REC would also remain unchanged at about 3 per cent.

The major benefits would be for the States in the form of substantially low lending rates. However, loans taken by the States have been upwards of 12 per cent, from other financial institutions. In some cases, the loans are about 14 per cent, and these debts are expected to mature only by 2008-10, from institutions such as Hudco, LIC and other general insurance companies.

But for taking over such loans, the States themselves would have to assume the onus of meeting the prepayment charges to the existing lenders. Despite this high exit costs, State utilities were still prepared to go ahead to with the takeover. This was because the loans provided by the REC would be available for a long-term basis, well beyond 2010, and thereby lightening the repayment burden on the States. Reduced financing costs, the sources said, would de-stress the balance sheets of the power utilities, especially at time when they are in the process of reforming and unbundling.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Kerala climate turning fickle

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line