Shunglu panel may propose stricter norms for bank loans to power distribution utilities

Pratim Ranjan Bose Kolkata | Updated on July 26, 2011

Short of cash because of low tariffs, State power distribution utilities (discoms) have borrowed nearly Rs 1,50,000 crore over the last two-three years from banks without the backing of a State guarantee.

This overexposure of banks, mainly in the public sector, to the financially weak utilities is the startling finding of the Shunglu Committee that is reviewing the financial health of power distribution utilities in the country. The high-level committee, chaired by the former Comptroller and Auditor-General of India, Mr V. K. Shunglu, is expected to submit its report in the next two months.

The loans the discoms have taken reportedly include approximately Rs 20,000 crore worth of long-term finance taken by the utilities against capital projects, but apparently “diverted” to meet the working capital shortfall.

While political resistance to tariff rationalisation is the prime reason behind the cash shortfall in discoms, the adoption of FRBM (Fiscal Responsibility and Budget Management) norms makes it impossible for States to take responsibility of such practices by standing guarantor to banks. Yet, inexplicably, banks have been financing utilities.

Tariff reforms on cards

Preliminary estimates by the Planning Commission as well as the last Finance Commission suggest that the discoms are losing up to Rs 75,000 crore of revenue annually — almost half of which is attributed to lower tariff realisation. “This is a very serious weakness of the Indian power sector, which, if not addressed, may cripple the entire system,” the Planning Commission Deputy Chairman, Mr. Montek Singh Ahluwalia, had told Business Line in February.

Sources suggest that following the submission of the Shunglu Committee report, the Planning Commission may suggest the introduction of stricter banking prudence for lending money to distribution utilities. Aiming to suggest ways to improve the health of discoms within the existing set of laws, the Shunglu panel may also suggest a series of measures for State-level tariff reforms and incorporation of corporate governance, an area that is apparently most neglected in the operations of discoms.

Disproportionate lending

Initial findings suggest that the discoms of Tamil Nadu, Rajasthan and Uttar Pradesh account for nearly 85 per cent of the Rs 1,30,000-crore short-term borrowings from banks. More surprising is that the loans to each of these three discoms surpass their respective net worth by 150-350 per cent. The disproportionate lending is reportedly most apparent in the case of Rajasthan.

More and more State utilities are found to be turning to the banking sector to meet their ever increasing cash shortfall. Madhya Pradesh and West Bengal are two such new entrants in the list.


According to sources, Andhra Pradesh, Kerala and Karnataka are the exceptions. The utilities in Andhra Pradesh and Karnataka are reportedly receiving state provisioning to meet cash shortfall, if any.

Published on July 19, 2011

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