Power sector financing: PFC, REC might have to overhaul portfolio

The two state-owned and largest lenders to the power sector have had a dip in their loan sanctions over the past four years.

Power Finance Corporation's (PFC's) loan sanction are down 41 per cent from what it was in 2012-13, to Rs 44,328 crore in the past financial year. For Rural Electrification Corporation (REC), sanctions fell seven per cent in 2014-15, from 2012-13. In 2015-16, though, its loan sanctions rose to Rs 54,422 crore, owning to a rise in renewable energy (RE) projects asking for financing.

Loan disbursement is showing a similar downward trend in PFC, sliding 27 per cent in the past four financial years. As for REC, the disbursement numbers are mixed — RE at zilch, negative in generation and slight growth in transmission.

PFC officials said the pipeline of big-ticket generation projects was empty. As for independent power projects based on conventional fuel, 18-20 Gw capacity is without any power purchase agreement. In the past five years, no generation project has achieved financial closure, by market data.

“These projects will come for a loan proposal only when they sign purchase contracts. But, then, power prices in the spot market have come down to Rs 3 a unit, making states choose short-term power purchase than sign long-term agreements," said an official. Senior executives at REC and PFC acknowledged their top line could be hurt due to lack of investment in the sector, especially conventional power generation. “The bottom line (profits) would remain intact as existing loans undergo restructuring,” said a PFC official, requesting anonymity. The chairmen of REC and PFC did not reply to mails seeking their responses.

At Rs 1.33 lakh crore, PFC and REC are the largest lenders to the state electricity boards (SEBs), which are now cumulatively battling debt exposure of Rs 4 lakh crore. The new Ujwal Discom Assurance Yojana (UDAY) aims to restructure this debt by floating sovereign guaranteed bonds at market rates. It also restricts future borrowings by states till their respective distribution companies (discoms) clear their books.

In the bond issuance under UDAY by eight states, PFC and REC did not pick up any. The Union ministry of power had said there was no pressure on state lenders to pick up these bonds. This would help them fund fresh investment. Another round of lending to power discoms or SEBs would happen only after they turn around financially. “We have not accepted applications of the states for short-term loans, as UDAY envisaged. We will only finance operational expenditure and that would be a per cent of the SEB’s revenue  ast year. As most of them are loss making, UDAY is the hinge here for future lending proposals,” said a senior REC official, not wanting to be named.

Analysts said there was a looming downgrade threat for PFC and REC. With no new generation projects coming up and loans extended to the distribution sector undergoing restructuring, the two could be looking at a complete overhaul in their portfolio – moving more towards transmission and distribution and the upcoming RE segment.

However, challenges abound in these two sectors as well, as the lending model is different from typical power generation, and difficult. “These two lenders are used to long-term financing. Both transmission and renewables involve at least three cycles of re-finance,” said a Delhi-based sector expert.

In RE, there is a beeline of projects but foreign lenders are not comfortable with the terms and tenure of lending of state-owned lenders. The lenders, said the analyst, would have to change their terms to accommodate the upcoming sectors.

Source: Business Standard