Finance minister Nirmala Sitharaman has announced a ₹90,000-crore loan “against State (government) guarantee” to power distribution utilities (discoms) to mitigate the liquidity crisis in the power sector. But will it work?

The Association of Power Producers, a body of private power producers, welcomed the step to offer the loan — through the Power Finance Corporation (PFC) and/or the Rural Electrification Corporation (REC) — against a total receivable of ₹94,000 crore to generation companies (gencos).

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However, State-level officials and sources in private gencos feel the window may not work to its potential, as most States may be unwilling to offer guarantee as they have exhausted the borrowing limits under the Fiscal Responsibility and Budgetary Management (FRBM) Act.

Unpaid bills

Relaxing the FRBM limit may not solve the problem either, as most State governments will prefer to offer cash to people rather than paying bills of discoms. Available estimates suggest non-payment of bills by State government departments is the primary reason behind the payment default by discoms to gencos.

According to sources, discoms have failed to recover ₹40,000-45,000 crore of dues from States. Disconnection of supply is impossible as many departments, such as the police — are carrying out essential services during the Covid-19 lockdown.

“States have no money, so they do not pay the entire budgeted amount to the departments. The departments, in turn, deny payment to discoms,” said a senior State official.

According to him, many discoms will fail to use the loan window to its full potential and clear dues to the generation sector.