PFC's power drive flickering under record debt burden, govt scheme

The state-run financer for generators and distributors is struggling under a record debt burden even as it is being asked to underwrite the government's latest scheme to rescue inefficient discoms

Union Bank of India failed to find buyers at an auction for Rs 2,077 crore of debt exposure to KSK Mahanadi Power, despite lowering the reserve price, reports say, reflecting the value the market ascribes to power sector debt.

So, it’s no surprise that New Delhi is concerned over mounting dues by state-run utilities to generators. At over Rs 1.3 trillion — sufficient to cover Rs 6,000 in annual payments to farmers under PM Kisan for two years — the dues keep rising despite several attempts at reforms.

Lost in all that noise is the money that India’s power sector owes state-run Power Finance Corporation (PFC), a listed company that is the mother lode of electricity finance for generators and distributors, with Rs 7.6 trillion in exposure on a consolidated basis. In FY2019, the lender acquired the Centre’s 52.63 per cent share in Rural Electrification Corporation (REC) for Rs 14,500 crore, helping to shore up the government’s disinvestment revenues.

Now, PFC, the largest government-owned non-banking finance corporation, and REC will also lend over Rs 1.2 trillion to state discoms under New Delhi’s latest initiative to improve state utilities’ efficiency. That comes on top of a sanctioned loan of Rs 1.33 trillion of which Rs 1.04 trillion was disbursed until February 2022, under a previous scheme (known as UDAY for short), the failure of which led to the Revamped Distribution Sector Scheme (RDSS).

PFC’s loan book is 27 per cent higher than pre-Covid 2019. In the five years to FY2022, it has sanctioned Rs 540,538 crore and disbursed Rs 339,633 crore, excluding loans provided under the Restructured Accelerated Power Development and Reforms Programme, which was introduced in 2008 by the United Progressive Alliance.

PFC has lent mostly to government entities. Nearly 60 per cent of disbursements are to state-owned distribution companies (discoms), a chronically ailing sector, and 35 per cent for generation, largely coal-fired and a sunset business.

“Overall PFC and REC play a major role in implementing government policies, and are important for financing India’s power sector, particularly government sector power utilities,” said Hetal Gandhi, director, CRISIL Research. These players are the largest lender to the power sector with a share of over 30 per cent.

The downside, as an HDFC Research report pointed out, is that the “high concentration of exposure towards financially weak state power utilities and the vulnerability of its exposure to private sector borrowers increase the portfolio vulnerability”. “Discoms are an inherently weak asset class,” it added, “and even the private sector has increasingly become vulnerable owing to issues such as lack of fuel availability, inability to pass on fuel price increases, and absence of long-term power purchase agreements.’’

PFC, however, does not fully acknowledge this problem. In a recent presentation, it said the provision coverage ratio or the percentage of funds set aside for losses for non-performing assets (NPAs, or bad debts) tripled to 69 per cent last fiscal from 23 per cent in FY2018. PFC’s return on net worth has halved to 11 per cent in the first half of FY22 from 21 per cent in FY2019, according to ICRA.

PFC said its NPAs totalled Rs 20,915 crore and REC’s Rs 28,784 crore, all in the private sector. Despite the parlous state of state utilities, both entities said government-sector outstanding is nil. That’s mainly because these loans are guaranteed by the state.

In PFC’s annual report, chairman Ravinder Singh Dhillon said “the company continues to enjoy the highest domestic credit ratings for its long-term and short-term borrowing programmes”. But the AAA ratings by CRISIL and ICRA reflect New Delhi’s guarantees rather than a vote of confidence in the company’s lending.

But as ICRA analyst Karthik Srinivasan said in a March note: “ICRA could change the rating outlook to negative or downgrade the ratings on a change in the ownership and/or a change in PFC’s strategic role or importance to the government.”

Put simply, PFC’s worth is only as good as New Delhi’s sovereign weight. This is ironic because India’s tottering utilities have not only put the health of generators at stake but also the well-being of India’s biggest power sector lender, principally on account of their politically-directed under-recoveries from certain consumer segments.

Given this, Brajesh Singh, president, Arthur D Little, India, pointed out that “the government will have to keep stepping in and direct public sector units to extend a line of credit to discoms or give out relief packages as it simply cannot let the discoms fail”. In the longer run, he pointed out, this is unsustainable and it is critical for the discoms to become self-sufficient and profitable by solving their operational issues.

That will be tough. Estimated aggregate technical and commercial (AT&C) losses for FY2022 for the key 10 states (comprising 70 per cent of India’s power demand) was 20.7 per cent, according to CRISIL Research. Of these, the worst performing states are Madhya Pradesh and Uttar Pradesh with around 30 per cent AT&C, Gujarat and Karnataka being the best. Globally, most efficient power distribution systems have AT&C losses of 6-8 per cent.

“Significant capex is required to improve billing, collection efficiencies, and reduction in technical losses. The timeline could be three to five years for AT&C loss to fall below 15-20 per cent,” Divya Charen, associate director, India Ratings & Research, said. The effective implementation of RDSS is key, she added. The RDSS is a results-linked scheme that, among other things, aims to reduce AT&C losses to 12-15 per cent by 2024-25, and eliminate utilities’ dues.

That still leaves PFC with weak assets on its books, even if some carry sovereign guarantees. Arthur D Little’s Singh suggested the creation of a stressed asset company to take over and run the operations of the most underperforming discoms. “This can be done via collaboration with strategic investor partners,” he said.

Whatever the options, the bottom line is that states need to make electricity reforms work. “Given the concurrent nature of electricity in our Constitution, the states must come on board for effective implementation of reforms in the distribution segment,” said Vikram V, vice-president and sector head - corporate ratings, ICRA. “A strong political will is needed at the state level to achieve this objective,” he added. Indeed, PFC’s future depends on this resolve.

DEBT WISH

• PFC on a consolidated basis carries a loan exposure of around Rs 7.6 trillion
• It bailed out New Delhi by buying the Centre’s stake in REC for Rs 14,500 crore in 2019, shoring up disinvestment receipts
• Most of its exposure lies in the government sector, with nearly 60 per cent towards distribution, an inherently weak business
• State utilities already have over Rs 1.3 trillion in outstanding towards power generators
• Most of PFC’s exposure to generators are in coal-fired power, a sunset business globally
• PFC is the nodal agency for administering New Delhi’s latest initiative to reduce losses in distribution under a Rs 3.04-trillion package, taking on more risks on its books
• The provision coverage ratio or the percentage of funds set aside for losses due to bad debts trebled to 69 per cent last fiscal year, from 23 per cent in FY18, indicating the risks inherent in India’s fast growing, but financially unstable, power sector