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Liquidity booster for discoms to save 9.4 GW capacity from defaults: Crisil

G Balachandar Chennai | Updated on May 20, 2020

There has been a big fall in electricity demand from high tariff paying industrial and commercial consumers, and collection efficiencies of discoms have also dropped because of the lockdown   -  Sushil Kumar Verma

The government’s move to provide ₹90,000 crore loans to state power distribution companies (discoms) would help 9.4 GW private thermal coal capacities from defaulting post moratorium.

The Finance Minister’s announcement would help clear a chunk of discoms’ obligations to power generation companies, says a report by Crisil.

The ₹90,000-crore loans are to be provided through Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) against receivables of discoms backed by state government guarantees.

It will come at a time when about 53 GW coal capacities of independent power producers – excluding 22 GW under debt resolution – are facing the ramifications of the liquidity squeeze at discoms.

There has been a big fall in electricity demand from high tariff paying industrial and commercial consumers, and collection efficiencies of discoms have also dropped because of the lockdown. This has raised the risk of either curtailing electricity purchases or delaying payments based on high-cost power purchase agreements.

“The bulk of these 53 GW capacities can withstand cash flow pressures owing to their liquidity buffer and/or parentage. But the risk would be higher for about 9.4 GW of capacities (with debt of about ₹49,000 crore) because their liquidity cushion is so low, an additional delay of even one month can cause them to default on financial obligations,” says Manish Gupta, Senior Director, Crisil Ratings.

The at-risk capacities have either inefficient power purchase contract structures (payments are linked to offtake for 5 GW capacities) or high generation cost (for 4.4 GW projects), making them disproportionately susceptible to payment delays by discoms.

While most of these capacities have availed of the three-month moratorium announced by the Reserve Bank of India till May 31, 2020, sustained disruption in cash flows will make them vulnerable versus obligations in June (accrued interest and regular principal repayments).

Also, most of these capacities may not have adequate letter of credit limits to defer fuel payments by a quarter.

Thus, the ₹90,000-crore liquidity injection to discoms comes at an opportune time for these generation companies, and can potentially alleviate the interim risks.

“How quickly the money is injected will be critical as these capacities have limited ability to withstand delays,” feels Ankit Hakhu, Director, Crisil Ratings.

“This includes the timely formulation of the scheme and approvals of guarantees by the state governments. Moreover, as the loans would be made available to the discoms the extent of liquidity pass-through to generating companies will be crucial to reduce vulnerability,” he adds.

Published on May 20, 2020

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