Discoms’ rising debt, persistent losses may hit State finances: RBI

Venkatesh Ganesh Mumbai October 28 | Updated on October 28, 2020

Covid-led lockdowns to further affect financial position of discoms, says report

An increase in debt, coupled with persistent losses of power distribution companies (discoms) and rising guarantees, could negatively impact State finances going forward.

According to an RBI report on State finances, for 19 States, the debt-GSDP ratio is expected to exceed 25 per cent in 2020-21. This may result in curtailing of capital expenditure, which could be applicable to discoms, which now have dues in excess of ₹1-lakh crore.

Also read: States should be responsible for discom finances, says IEEFA India

The financial position of discoms is expected to weaken further this fiscal, as Covid-19 related lockdowns have severely impacted power demand, particularly in the lucrative industrial and commercial segments, while their cost structure is rigid due to minimum commitments for power offtake in long-term Power Purchase Agreements (PPAs). The problem gets compounded by the pandemic.

Liquidity support

While the Centre has announced liquidity support of ₹90,000 crore for discoms, with an intention to tide over immediate liquidity concerns, another round of bailouts of loss-making discoms seems imminent in the aftermath of the crisis, said the RBI. This implies downside risks to State finances, it added.

Also read: Power sector stress building up from well before Covid-19

Along with higher borrowings and the associated servicing costs, the debt sustainability of States is vulnerable to risks arising out of potential realisation of contingent liabilities in the form of State guarantees, which have increased in the aftermath of Covid-19. The government’s ₹90,000-crore liquidity infusion or bailout adds to discoms’ contingent liabilities by 0.42 per cent of GDP in 2020-21.

“Historically, any large accretion to States’ outstanding guarantees has, in general, been followed by an increase in debt,” the RBI noted. State guarantees, which increased prior to 2014, fell sharply thereafter, primarily driven by subsuming of power sector guarantees into State government liabilities under the UDAY programme. However, the RBI has pointed out that since 2017-18, net accretion to guarantees has seen a significant jump, which would dissuade lenders to lend in the backdrop of strong guarantees. Also, States are not adhering to a cap of 2 per cent of GSDP, which is considered optimal.

Downside risk

The RBI has also warned that State-owned discoms continue to impart significant downside risk which is leading to higher States liabilities with no visible signs of turnaround.

States’ outstanding liabilities increased by 1.5 per cent of GDP due to UDAY in 2015-16 and, in 2018-19, it continued to worsen. Further, estimates of the revenue gap per unit of power sold — which is the average cost of supply minus average realisable revenues (ACS-ARR gap) — for 2019-20 reveal that most States have seen a further worsening in their financial performance.

Only five States — Maharashtra, Assam, Goa, Gujarat and Haryana — have eliminated revenue gaps in 2019-20, thus meeting the UDAY target. Jammu and Kashmir, Rajasthan, Andhra Pradesh and Telangana have the highest revenue gaps, which have widened further in 2019-20. “In summary, what the RBI is saying is that structural issues remain to be addressed," said Rupesh Sankhe, Vice President at Elara Capital.

Published on October 28, 2020

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