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Weak financials of state-run electricity distribution companies can affect capital expenditure in the power sector, states a recent research report by broking company Edelweiss Securities. These electricity companies are trapped in a vicious cycle of high losses and debt burden, limiting their capacity to sign power purchase agreements (PPAs) with private project promoters.
The firm said that since FY09, not only have losses of power distribution companies doubled but a few have reported loss at the EBITDA (earnings before interest, tax, depreciation and amortization) stage. This has led to higher borrowings to service interest and loan instalments.
Till FY09, commercial loans to the power sector totalled Rs 200,000 crore; half of that went to distribution companies. Edelweiss estimates the latter share to have doubled in the last 18 months. Loss funding by banks and financial institutions is pegged at Rs 50,000 crore. The firm's enquiries put the annual losses of three SEBs funded via loans at Rs 30,000 crore.
Ad hoc remedies
As yet the SEBs have avoided bankruptcy using ad hoc remedies such as short-term loans, marginal tariff hike, minor guarantees and additional borrowings to service existing loans. Now, banks have started declining incremental loans to SEBs. Recent directives from the Reserve Bank of India to restrain lending, although meant to check inflation, may encourage banks to stave off SEBs, precipitating onset of long delayed crisis, Edelweiss says.
Most loans to SEBs are not backed by State Government guarantee, putting a question mark over recovery of such debt.
Piecemeal interventions
With elections coming up in several key States, the financially tottering SEBs would be kept afloat by piecemeal interventions. But when political exigency fades, economics returns. The weak SEBs would be left on the brink of bankruptcy. The silver lining is that SEBs with extreme financial woes are few. Hope also springs from the precedent of loan waivers and debt write-offs that governments did in the past.
However, sensible economics would be to revise tariffs, privatise (with upward revision in tariffs implicit in such arrangements) and restructure loans. That way, most worries pertaining to non-performing assets can be addressed.
Thanks to politics, the economics of electricity, it would seem, has acquired shock value.
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