REC Releases Details for Bailing Out Power Distribution Companies Amid Coronavirus Crisis

Loans will be disbursed in two tranches


The Rural Electrification Corporation Limited (REC) has announced an opportunity for the distribution companies (DISCOMs) to avail loans to clear their dues.

The loans under this program will be co-funded by REC and Power Finance Corporation (PFC) in equal amounts. As per the announcement, 50% of the loan will be provided in Tranche-I, and the balance 50% will be provided in Tranche-II. The limits set under the Ujwal DISCOM Assurance Yojana (UDAY) program will not apply to these loans.

This comes on the heels of the government’s economic stimulus package in which it announced that DISCOMs would receive ₹900 billion (~$12.03 billion) to help the Indian economy recover from the coronavirus crisis.

These dues pertain to the central public sector undertaking (CPSU) generators, independent power producers (IPPs), and renewable energy (RE) generators as on March 31, 2020. The loans will be provided at the sole discretion of the REC.

All state-owned DISCOMs, combined generation, and distribution companies holding companies having administrative control of DISCOMs, companies buying power on behalf of DISCOMS, as well as private DISCOMs, will be eligible for loans under this announcement.

The DISCOMS will have to give the details of the due amount in the form of electricity bills of the state government departments, companies, and other bodies. The electricity duty payable to state governments will be deducted while determining the extent of the loan. The payment will be released to the CPSU generators, renewable generators, IPPs, and CPSU transmission companies after being authorized by the respective DISCOMs.

Speaking to Mercom, a former official of REC, said, “The loan announced by the government is a bonanza for the state governments to bail out the DISCOMs and help them clear the dues. The loan will help to increase the value chain of the power sector – the whole link- DISCOMs, generators, and the end consumers.”

The borrower will have to submit the state bank guarantee with due approval from the state finance department before the first installment of the loan.

The duration of the loan will be valid for ten years, and this will include the moratorium, not exceeding three years. Depending on the duration of the loan, the period of the moratorium will be decided on the merit of each case. If the DISCOMs decide to prepay the loans by availing loans from financial institutions or banks, a pre-payment charge of 1% will be levied.

In terms of the pre-commitment conditions, the DISCOMs should enable digital payments of electricity bills and should enable self-assessment by consumers. Also, the DISCOMs should install smart meters at government offices and other places to ensure electricity dues are paid regularly, and they should submit a report duly authorized by the finance department regarding the outstanding dues of the state government departments.

Tranche-I: Pre-disbursement conditions

The borrower should not have any overdue in the books of REC or PFC. To execute an agreement between the REC, PFC, DISCOM, and the state:

  • There should be a liquidation plan for clearing of dues by the state government towards unpaid electricity dues
  • There should be a liquidation plan for clearing the unpaid subsidy amount to the DISCOMs
  • The dues paid by the state government should be used to repay the outstanding loan amount to REC and PFC
  • The state government should ensure timely payment of electricity bill dues to DISCOMs

Tranche-II:  Pre-disbursement conditions:

  • The borrower should not have any overdue in the books of REC/PFC
  • DISCOMs should show that the agreements given at the time of Tranche-I have been implemented or are under implementation
  • The state government has a plan in place to bring down its aggregate technical and commercial losses and ACS-ARR (average cost of supply and average revenue realized) gap over the next three to four years

In case the state government does not adhere to the liquidation plan, an additional interest of 0.25% will be charged on the outstanding loan amount. In the future, if the state government fails to make the payment within 60 days of their due dates, they will have to pay an additional interest of 0.25%.

The above conditions will also be applicable for private sector DISCOMs.

Recently, the Finance Minister Nirmala Sitharaman announced the proposal to privatize DISCOMs in the union territories. These include Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, and Daman and Diu, Delhi, Jammu and Kashmir, Lakshadweep, Ladakh, and Puducherry.

It is unclear how many states will decide to avail these loans, considering they have to guarantee the loans.

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