Stringent financing norms to hit PSU power companies: Banks

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

The issue was raised in an interaction between officials from various departments including the finance ministry and bank executives last month, a government official told ET.

Banks have been asked to suggest options without diluting the guidelines.


Inability to access bank funds could adversely impact these power utilities already facing high electricity demand.

"There is a concern that if the additional regulations are implemented, it may also impact the existing exposure and make those accounts stressed," he added.

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

Nudged by the power ministry, state-run Power Finance Corp (PFC) and REC had approved more stringent prudential lending norms, which linked further finance to electricity distribution companies to more operational and financial efficiency.

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

Possible options

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

"Most of the state power entities may not be complying with all the norms thus making them ineligible for any credit," he said.

Banks say these additional guidelines can be considered while carrying out due diligence along with other relevant factors like the availability of government guarantees, but suggest meeting these additional norms should not be mandatory for taking credit exposure to power distribution companies.

Factors such as external rating and repayment track record can be taken into account if the utility firm is not able to meet all the set criteria, said a banker.

Another banker said that if banks were also allowed to set up an escrow mechanism like that for PFC there could be some safeguard for the commercial lenders.

The dues of distribution companies to power generation companies rose by more than 23% to Rs 1.03 lakh crore at the end of March as compared with Rs 83,709 crore a year ago.