The Association of Power Producers (APP) has given a representation to Finance Minister Nirmala Sitharaman regarding funding issues in power sector.
The letter by Ashok Khurana, Director, Association of Power Producers (APP) has sought key financial support required for revival of the infrastructure industry.
“Unfortunately, the power sector, which would have a pivotal role in achieving the target of a $ 5 trillion economy by 2024, is presently suffering from stress due to systemic issues and is facing challenges with financing, thereby resulting in waning of investment appetite,” Khurana said in the letter.
APP has listed key initiatives on the financing side which, when coupled with policy and regulatory changes currently under consideration, can remove stress and re-energize the sector.
On Tap Targeted Long Term-Repo Operations (TLTRO) have been used by RBI to infuse infused liquidity of Rs 2.5 lakh crore through banks under this mechanism.
RBI has also allowed this facility to be exempted under the large exposure framework. However, Banks have restricted their funding to few corporates with high rating (AAA & above) or to sector specific industries like agriculture, MSME and pharma/healthcare.
APP said the pPower sector needs continuous investment in order to meet the new environmental emission norms and also for new projects in the Renewable sector.
Considering the severe liquidity shortfall affecting the power sector value chain, government had earlier announced a Rs 90,000 crore liquidity infusion package to the States to pay their dues, which was subsequently hiked to Rs 1.2 lakh crore.
However, only around Rs 31,000 crore has been disbursed to the States till date whereas on the other hand, the current overdue amount to generators has increased to approximately Rs 1.25 lakh crore as on September 2020.
“Considering the above issues faced by the power sector, we request GoI/RBI to undertake a specific TLTRO tranche of Rs 1 lakh crore focused on Infrastructure Companies with minimum investment grade rating. This will help power sector companies to meet their capex requirement for setting up new projects in the renewable sector, for the environmental emission control equipment and for their working capital needs,” APP said.
APP has also said that the proposed Development Finance Institution to fund infrastructure projects may be hastened to solve the infrastructure financing needs of the country.
Further, for this proposed DFI, the Govt should allow for a separate Credit Rating system, Expected Loss Method (ELM), which was evolved by a government appointed committee for infrastructure projects, needs to be adopted by CRAs as also lenders for rating of infrastructure projects and also for capital provisioning.
Stringent criteria of defining stress (like one-day delay in meeting debt servicing obligation which includes monthly interest) is not suitable for assessing loan quality of powers sector assets, considering the ecosystem in which it operates (long delayed payments from the procurers) and the long life of such projects. Such criterion makes it difficult for banks to fund power sector investments.
Banks, due to continuing stress in the power sector, are reluctant to fund the investment needs to meet the new environment rules for coal based power plants, where India needs around Rs 50,000 crore of investment for the remaining 120 GW of power plants which are yet to place FGD equipment orders.
It as suggested government should consider lowering of Risk Weights for Calculations of Capital Charge for Credit Risks from 100 per cent to 50 per cent 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.
Further, in order to incentivize local manufacturers like BHEL, L&T and also to implement ‘Atmanirbhar Bharat’ in power sector, government may provide Interest subvention scheme for local manufacturers as this will help the 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, APP said.
RBI has been progressively tightening its NPA recognition norms, which needs to be re-examined to see if a lighter approach can be adopted for infrastructure sector. The need is to differentiate between a “good” borrower & a “wilful defaulter” & accordingly Banks can be given more flexibility in loan restructuring and provide support through mechanisms such as extended moratorium period and adopting sustainable interest rate regime.
APP has requested one-time restructuring of all accounts, which were ‘standard’ (i.e. overdue less than 90 days) as on March 1, 2020 and also permitting bilateral restructuring without insisting for Inter Creditor Agreement & escrow mechanism.
It has also sought measures on unlocking of funds stuck in arbitrations and receivables from government agencies.
One of the biggest challenges that has afflicted power companies are the large overdue of receivables pending over long time, including regulatory dues. Recovery of such dues are 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.
“A mechanism or policy framework needs to be formulated, in lines of MSME Act & Consumer Dispute Resolution Act, wherein at least 75 per cent of the claim amount has to be paid by any party in order to file an appeal challenging the orders of regulatory commissions. The amount can be adjusted in future once the final judgement from higher courts are given.
“This becomes essential to stop frivolous appeals, provide some sanctity to the Orders of the tribunal/Commissions, eliminate the inordinate delay in realising the money and huge relief to the cash strapped infrastructure sector,” APP said in the letter to the Finance Minister.