Late payment surcharge: Govt’s move likely hit gencos in repayment of dues

Venkatesh Ganesh Mumbai October 13 | Updated on October 13, 2020 Published on October 13, 2020

Draft discussion points out the necessity of late payment surcharge to reflect the current cost of borrowing

The power ministry’s recent draft on late payment surcharges could increase delays in outstanding payments for power generators.

“This move will result in an increase in delay in payments to gencos as there is no gain,” said Rupesh Sankhe, Vice President at Elara Capital. There are also concerns that this could do the exact opposite of what the government intends to do. “The higher interest rate was to instil financial disciplin,e but it resulted in piling up of dues,” said Sankhe.

The Ministry of Power in a recent draft which is up for public discussion, has pointed out that the rates of late payment surcharge must reflect the current cost of borrowing. When the late payment surcharge shall be payable on the payments outstanding after the due date at the applicable bank rate or the rate as provided in the power purchase agreement, whichever is lower.

The government in its draft said: “The rate at which late payment surcharge is applicable payable on outstanding amount shall increase by 50 basis points each month after the expiry of the first month, subject to a maximum of applicable bank rate plus 200 basis points. All payments by a distribution company (discom) to a transmission company (genco) will be adjusted first towards late payment surcharge and then monthly charge.” Bank rate means the marginal cost of funds for one year as per SBI rates of 7 per cent plus 500 basis points (5 per cent).

The government took these measures as power distribution companies and state governments requested a waiver of late payment surcharge given the situation arising from severe restrictions placed during the lockdown. Also, payments could not be collected from consumers. The Ministry then issued directions to the Central Electricity Regulatory Commission (CERC) to specify a reduced rate of late payments surcharge.

Piling up of dues

Till lockdown, the late payments surcharge was 18 per cent annually or 1.5 per cent per month, which the discom had to pay to a genco. After the lockdown was lifted, the Power Ministry said that instead of 18 per cent surcharge, it be reduced to 12 per cent, to give some relief to discoms whose piled up dues have exceeded ₹1 lakh crore (as per government PRAAPTI portal).

However, this move could have negative ramifications. “Some of our members have voiced concerns around a possible delay in payments from discoms. We are still in the process of getting responses from stakeholders,” said a CEO of an industry association. Industry bodies such as Association of Power Producers and the National Solar Energy Federation of India (NSEFI) who represent 150 companies in India did not respond to queries as they are in the process of getting inputs from their members.

Earlier the discom would borrow 18 per cent from the market. Out of this 12 per cent (which is based on SBI’s market lending rate) was used to pay gencos and the 6 per cent gain (18 minus 12), would be used for working capital requirements. The discom then collected the dues from end consumers.

Recently, the government announced a liquidity infusion of ₹1.2 lakh crore through Power Finance Corporation and Rural Electrification Corporation to help cash- strapped Discoms pay their dues till June 2020. Some of the discoms were ineligible for getting loans as they could not meet working capital limit norms.

The problem also gets accentuated as, given the low credit rating of most of the Discoms, the funds attract a higher interest rate. The cost of financing is increased as the associated risk is high, according to Vibhuti Garg, Energy Economist at IEEFA.

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Published on October 13, 2020
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