These Non-Bank Lenders Are Bearing India’s Power Sector Pain
PFC, REC are channeling funds towards cash-strapped power discoms. Could these non-bank lenders see risks rise?
The Indian government is leaning on two state-owned non-bank lenders to provide relief to strained power distribution companies, who in turn were delaying payments to power producers.
To break the cycle, Power Finance Corp. Ltd. and Rural Electrification Corp. Ltd. have been given the task of providing nearly Rs 90,000 crore in loans to state discoms. The rules have also been eased to ensure funds can flow through to the power distributors beyond lending limits permitted so far.
While these loans are backed by states, risks could emerge if state government and discom finances weaken, leading to overdues on these loans.
Emails sent to PFC and REC on Thursday seeking details of their lending strategy under the discom package went unanswered.
The Rs 90,000 Crore Package
The Rs 90,000 crore package, approved by the government in May, was to be in the form of soft loans, backed by state government guarantees.
To ensure that regulatory restrictions do not get in the way of full disbursement of the package, the government on Aug. 19 provided a one-time relaxation allowing PFC and REC to provide working capital loans to distribution companies, above the 25% cap of the previous year’s revenue set under the Ujwal Discom Assurance Yojana.
PFC and REC have sanctioned Rs 68,000 crore in loans and disbursed close to Rs 25,000 crore so far, said a person familiar with the scheme, speaking on the condition of anonymity. Instead of giving the loans to discoms, the funds are being paid directly to generation companies from whom state distribution companies receive electricity supply, this person said.
The package was announced as overdue bills to generating companies started to rise after the Covid-19 crisis struck. “With power demand weak and cash losses high amid the Covid-19 pandemic, discoms would end up owing lenders a staggering Rs 4.5 lakh crore by the end of this fiscal, or 30% more than last fiscal,” ratings agency Crisil Ltd. said in a note in June.
While the scheme was announced in May, disbursements have only now started to pick up, said Vinayak Chatterjee, chairman of the Feedback Infrastructure Group. “I do not think there was much disbursements in the June quarter and the discoms did not get any substantial funding during the first quarter of this year,” he said. In many cases, the funds have gone to the generation companies while it reflects as a loan on the books of the discoms, Chatterjee said.
According to an investor presentation made by REC after its first quarter earnings, the lender saw sanctions jump 73% to Rs 41,959 crore as of June end. Disbursements were marginally lower than last year. For PFC, data for loan sanctions was not provided but disbursements rose 65% to Rs 17,271 crore.
Risk For PFC, REC?
The borrowings are structured in a way that they are backed by the state governments.
The official quoted above said that the lenders do not see the risk of future defaults by discoms because the loans are backed by state government guarantees. However, the overdues by discoms could rise from their current levels, this person said.
Agreed Vinayak Chatterjee, chairman of the Feedback Ventures Group. Though the working capital cycle of discoms has been negatively impacted by the Covid-19 crisis, since the loans are guaranteed by the state governments, they would not be seen as potential bad debt. However, the financial health of discoms will need to be addressed, he said. “There is no doubt there is a financial crisis for discoms and the power sector which the new the draft Electricity Act Amendment of 2020 seeks to address,” said Chatterjee.
Liquidity & Capital Support
The additional lending that PFC and REC need to do will also mean that the two lenders will need to borrow more from the markets.
PFC has issued around Rs 30,800 crore in bonds since April and REC issued over Rs 23,000 crore in bonds during the same period, according to Bloomberg data. Compared to a year ago, PFC’s bond borrowings have risen 180% from Rs 10,975 crore, while REC’s bond market borrowings have risen 30% from around Rs 18,000 crore.
The borrowings concluded so far, however, may not entirely be for fresh lending but also for refinancing.
While the asset-liability management for both PFC and REC has historically been characterised by mismatches, the gaps have widened in the current fiscal following a 40-60% drop in collections due to the moratorium extended by these entities, said an analyst who spoke on condition of anonymity. Consequently, the market borrowings increased to match the refinancing requirements and gap funding, this person said.
Both entities may also need capital infusion from the government down the line. While their capital ratios are above the regulatory minimum, Reserve Bank of India has been prodding all lenders to raise more equity to protect against rising risks.
In the case of PFC and REC, that equity may need to come from the government. As of now there is no indication that the government will provide additional equity capital to either PFC or REC, the person quoted above said.
A power sector analyst said the requirement for further government capital would depend on whether state governments, whose finances are impacted due to the pandemic, can backstop any default.
Incrementally, the lending is happening to state government entities which provides comfort to both REC and PFC for the time being. But since we expect that power sector demand will be lower this year, it will hurt finances of discoms so there is a credit-risk for the lenders if state-owned power generators or transmission companies default, this person said on the condition of anonymity.