Stringent financing norms to hit PSU power companies: Banks

Banks have told the finance ministry that most of the public sector power units, including state distribution companies, would be ineligible for bank finance under the additional prudential lending guidelines suggested by the power ministry.

A government official told ET that the issue was raised during last month’s talks between officials of various departments, including the finance ministry, and bank officials.

Banks have been asked to suggest alternatives without changing the guidelines.

The inability to access bank funds may adversely affect these power utilities, already facing high power demand.

“There is concern that if additional rules are in place, it could also impact existing exposures and make those accounts stressed,” he said.

The power ministry had last year warned banks about the financial position of distribution companies and urged them to be cautious while sanctioning loans as it could adversely affect the banking system.

Under pressure from the power ministry, state-run Power Finance Corp (PFC) and REC had approved more stringent prudential lending norms, which linked finance to power distribution companies for greater operational and financial efficiency.

Union Power Secretary Alok Kumar had then written to various financial institutions asking state power distribution utilities to adhere to additional prudential norms introduced by PFC and REC Ltd before sanctioning loans.

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A senior bank executive aware of the developments said that there are around 10 parameters specified in the additional guidelines for mandatory implementation.

“Most of the state power utilities are not adhering to all the norms, thus making them ineligible for any credit,” he said.

Banks say these additional guidelines may be considered while doing due diligence along with other relevant factors such as availability of government guarantees, but suggest that power distribution companies meet these additional criteria to take credit exposure. Should not be mandatory.

A banker said if the utility firm is not able to meet all the prescribed criteria, factors such as external ratings and repayment track record may be taken into account.

Another banker said there could be some protection for commercial lenders if banks are also allowed to set up an escrow mechanism for PFCs.

Dues of distribution companies to power generation companies rose over 23% to Rs 1.03 lakh crore at the end of March, as against Rs 83,709 crore a year ago.

Originally published at Pen 18