The Association of Power Producers (APP) wrote to Hon’ble Minister of Finance, Nirmala Sitharaman, highlighting the concerns of power debtors and extended litigations that have been egging the power sector. The letter titled, ‘Request for key financial support required for revival of the infrastructure industry’, laid out the major issues pressing the sector and suggestion for its solutions.
At the foremost, it brought forward one of the biggest challenges afflicting the power companies, the large overdue of receivables pending over a long time, including regulatory dues. It spoke at length on how the recovery of such dues is inordinately delayed due to multiple litigations by the DISCOMs as a strategy to delay their payment obligation. Orders issued by regulatory forums are challenged as a matter of routine and honouring directions for interim payment issued by regulatory commissions are rare; even such orders from appellate tribunals are not adhered to in many cases and mostly end only at Supreme Court.
It then went on to suggest that a mechanism or policy framework be formulated, in lines of MSME Act & Consumer Dispute Resolution Act, wherein at least 75% of the claim amount has to be paid by any party to file an appeal challenging the orders of regulatory commissions. The amount can be adjusted in future once the final judgement from higher courts is given.
Excerpts of the other issues shared in the letter are as below:
On Tap Targeted Long Term-Repo Operations (TLTRO):
RBI infused liquidity of INR ~2.5 lacs Cr. through Banks under TLTRO mechanism allowing this facility to be exempted, under the large exposure framework. However, Banks have restricted their funding to few Corporates with High Rating or to sector-specific industries primarily excluding the power sector. Considering the severe liquidity shortfall affecting the power sector value chain, GoI had earlier announced a Rs 90,000 Cr liquidity infusion package to the States to pay their dues, which was subsequently hiked, to Rs 120,000 Cr. However, only around Rs 31,000 Cr has been disbursed to the States till date, on the other hand, the current overdue amount to generators has increased to approximately 1.25 Lakh crores as on September 2020.
Suggestion: APP requested GoI/RBI to undertake a specific TLTRO tranche of 1,00,000 Cr focused on Infrastructure Companies with minimum investment grade rating, helping power sector companies meet their Capex requirement for setting up new projects in the renewable sector, environmental emission control equipment and their working capital needs.
Low-Cost Infrastructure Sector Funding:
Since infrastructure assets need long term pay off, they cannot be financed, by the short-term liabilities of commercial banks. Largely concentrated exposures in banks have underscored the need for alternatives such as the modern autonomous Development Finance Institution (DFI) for long-term finance.
Suggestion: The proposed Development Finance Institution to fund infrastructure projects haste, to solve the infrastructure financing needs of the country. Further, for the proposed DFI, the Govt should allow for a separate Credit Rating system, Expected Loss Method (ELM), which was evolved by a govt. appointed committee for infrastructure projects needs to be adopted by CRAs as also lenders for the rating of infrastructure projects, and also for capital provisioning.
Incentivising Banks to lend to Infrastructure Sector:
Stringent criteria of defining stress are not suitable for assessing loan quality of powers sector assets, considering the ecosystem in which it operates and the long life of such projects. Such criterion makes it difficult for banks to fund power sector investments making banks reluctant to fund the investment. The power sector needs investments of around Rs 50,000 crore to meet the new environmental rules for coal-based power plants for the remaining 120 GW of power plants which are yet to place FGD equipment orders.
Suggestion: GoI can consider lowering of Risk Weights for Calculations of Capital Charge for Credit Risks from 100% to 50% in case of infrastructure loans & advances, giving tax breaks on Net Interest Margin (NIM) on infrastructure loans & advances and incentivizing banks to lend to Infrastructure companies through interest subvention. To implement ‘Atmanirbhar Bharat’ in the power sector GoI may provide interest subvention scheme for local manufacturers as this will help banks to lend to such companies to revive local manufacturing which has been subdued over the last few years due to low demand from the power sector.
Re-structuring:
RBI’s tightening of NPA recognition norms needs to be re-examined, to see if a lighter approach can be adopted for the infrastructure sector to differentiate between a good borrower & a wilful defaulter.
Suggestion: We request to allow one-time restructuring of all accounts, which were ‘standard’ (i.e. overdue less than 90 days) as on 1st Mar’20, and also permitting bilateral restructuring without insisting for Inter Creditor Agreement and escrow mechanism.
