Urge all to take special loan: R K Singh
Power minister wants states to pass on the benefit to consumers; suggests a three-pronged approach
The Centre’s efforts to improve the liquidity position of state-owned power distribution companies (discoms) is a one-time relief during the lockdown period.
The Centre on Wednesday announced a ~90,000 crore liquidity infusion into the power distribution sector.
Suggesting a three-pronged approach, the Union Ministry of Power is hopeful that several states will subscribe to the special loan scheme.
Speaking with Business Standard, RK Singh, Union minister of state for power, new and renewable energy, said loans given to discoms for paying their dues would be at concessional rates of interest.
Discom overdues to generation companies touched a record ~92,000 crore in February this year. For March, they stood at ~77,000 crore, according to the PRAAPTI portal of the ministry.
“The outstanding payment of the discoms to power-generating companies (gencos) has a late payment surcharge of 18 per cent. We reduced this to 12 per cent for the period of lockdown. But after lockdown, it will be again 18 per cent. So against that 18 per cent burden, we are offering them loans at 8-10 per cent,” said Singh.
Singh said this was the amount that power sector lenders like Power Finance Corporation (PFC) and REC would give the discoms.
“The normal spread that PFC and REC put on their loans is 2.5-3 per cent. For this loan, the spread would be 1.5 per cent. So, the loan would be
“THE FIXED CHARGE AGAINST POWER NOT BOUGHT HAS BEEN DEFERRED. THAT WILL BE REPAID 3 MONTHS AFTER THE LOCKDOWN IN 3 INSTALMENTS WITH NO INTEREST PAYMENT,” available at lower rates. This is to be repaid over 10 years with a moratorium of two years,” he said.
The minister, however, said states would have to submit a loss-reduction trajectory to PFC and REC
“The lenders can recall the loan if a discom doesn’t adhere to it,” said Singh.
He said state governments would have to ensure that any power dues of government departments to discoms were paid.
“The subsidy that any state gives on the electricity bill will have to be given in advance to the discom,” he said.
The national aggregate technical and commercial (AT&C) loss, or power supply loss due to an inefficient system of discoms, was at 20.8 per cent, or ~18,316 crore, as of December last year.
Under the l ast discom reform scheme, called the Ujwal DISCOM Assurance Yojana, the national average AT&C loss was supposed to come down to 15 per cent by March last year.
The other two components of the relief package aim at reduction in the cost of power. Central government gencos such as NTPC, NHPC, and DVC will give discounts on the tariffs they charge discoms.
“For the period of lockdown, central gencos will give discounts of 20-25 per cent on the power drawn by the discoms. We want states to pass on this discount to consumers,” said Singh.
The central gencos will defer the fixed- cost payment for the power states do not draw.
Tariffs of thermal power plants have two components — the fixed cost, which is the capital cost, and variable cost, which is the fuel cost.
Under a long-term power purchase agreement (PPA), buyers are obliged to pay the fixed cost to generators even if they do not procure power during a certain period.
“The fixed charge against power not bought has been deferred. That will be repaid three months after the lockdown in three instalments with no interest payment,” Singh said.
Earlier, the ministry had deferred interest payments on outstanding dues to generating companies.
This, the minister said, would be beneficial for the industries closed during the lockdown.
He said the states which got discounted power should pass on the benefit to their industrial consumers.
“We expect this relief to be passed on to industries closed during the lockdown. As the price of power comes down, households will get cheaper power and i ndustry will get deferment in paying the fixed cost for the power they did not use,” said Singh.
The minister said the discoms would have to get back to the prepayment mode of power supply as soon as the lockdown ended. They will have to pay generation companies first and then power would be supplied.
The government’s credit line and guarantee measures for non-banking financial companies (NBFCS) have not immediately resulted in a meaningful contraction in spreads in the corporate bond market, data shows.
Experts, however, are of the opinion that spreads will contract as the credit lines start to get utilised, and banks regain confidence about NBFC papers for the long term, armed with the partial credit guarantee.
On Thursday, Finance Minister Nirmala Sitharaman announced a special liquidity scheme of ~30,000 crore for NBFCS, housing finance companies (HFCS) and microfinance institutions (MFIS). All the investments made under this scheme will be guaranteed by the government.
In addition, the government said it will also extend the partial credit guarantee scheme to cover borrowings, such as primary issues of bonds, commercial papers of NBFCS, HFCS, and
MFIS, wherein the government will bear the first 20 per cent loss as guarantor for even unrated papers. This will enable another
~4 5,000 - crore liquidity support to the shadow banking industr y. Papers of lenders with credit rating AA and below will be eligible for investment under the scheme.
However, the measures failed to bring down the yields on corporate bonds immediately, as government bond yields also stayed almost flat from its previous close.
“There is still a huge exposure risk with NBFC papers, and the details of investment are not out yet. It will take some time, but the spreads will contract,” said the head of treasury of a bank.
A number of well-rated papers, and government entities were traded in the corporate bond market, even as lower-rated bonds were thinly traded. A 10-year bond of Nabard got traded at 6.88 per cent, REC at 7.56 per cent, while Aaa-rated HDFC three-year bond got traded at 6.94 per cent. The yields were marginally lower than usual.
NBFCS typically borrow debt maturing between 3 years and 7 years from the corporate bond market. Generally, the spread between the 5-year G -sec and an equivalent maturity AAA paper should be around 60-70 basis points (bps). In times of stress, this spread has even widened to 90-100 bps.
However, the spread is now at about 120 bps. For AA papers, the spread is now 185 bps and for A-rated papers, the spread is now at 290 bps, according to data from Fixed Income Money Market and Derivatives Association of India.
Even as shadow banks in the recent past have been hit hard, the Aaa-rated NBFCS did not face much of a problem. The Reserve Bank of India (RBI) did not find liquidity issues in the top 50 NBFCS it monitored. Risk-averse banks have been buying papers of only Aaa-rated NBFCS, whereas the need for liquidity is more felt in lower-rated firms.
And so, in the last ~25,000-crore auction of targeted long-term repo operations (TLTROS), banks barely borrowed half of the ~25,000 crore that the RBI gave them to on-lend to the NBFCS.
The government’s dedicated credit lines, along with a guarantee scheme, makes the situation a lot easier for NBFCS.
“Now even unrated bonds may get credit guarantee and is, therefore, a great enabler. We should see compression of spreads. However, the lukewarm response to the last tranche of TLTROS will bear a reminder that the implementation is as critical as before,” said R K Gurumurthy, head of treasury at Lakshmi Vilas Bank.
“The package announced by the FM on Wednesday opens access to funding for non-prime investment grade NBFCS, which had found very little appetite from banks through the TLTRO. The presence of a sovereign guarantee backing their issues will direct liquidity their way and help them tide over the challenges brought about by nonavailability of moratorium on their bank and capital market liabilities,” said Nachiket Naik, head, corporate lending at Arka Fincap.
Experts, however, are of the opinion that spreads will contract as the credit lines start to get utilised, and banks regain confidence about NBFC papers in the long term