APP writes to FM to Mobilize Unlocking of funds stuck in Arbitrations

The Association of Power Producers (APP) wrote to Minister of Finance, Nirmala Sitharaman on 17 November 2020, highlighting the concerns of power debtors and extended litigations that has been egging the power sector.

The letter titled, ‘Request for key financial support required for revival of the infrastructure industry’, laid out the major issues pressing the sector and suggestion for its solutions.

At the foremost, it brought forward one of the biggest challenges afflicting the power companies, the large overdue of receivables pending over long time, including regulatory dues.

 It spoke at length on how recovery of such dues is 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.

It then went on to suggest that a mechanism or policy framework be formulated, in lines of MSME Act & Consumer Dispute Resolution Act, wherein atleast 75% 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.

Excerpts of the other issues shared in the letter are as below:

  1. On Tap Targeted Long Term-Repo Operations (TLTRO):

RBI infused liquidity of INR ~2.5 lacs Cr. through Banks under TLTRO mechanism. It 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 primarily excluding the power sector. Considering the severe liquidity shortfall affecting the power sector value chain, Govt of India had earlier announced a Rs 90,000 Cr liquidity infusion package to the States to pay their dues, which was subsequently hiked to Rs 120,000 Cr. However, only around Rs 31,000 Cr has been disbursed to the States till date whereas on the other hand, the current overdue amount to generators has increased to approximately 1.25 Lakh crores as on September 2020. 

Suggestion: APP requested GoI/RBI to undertake a specific TLTRO tranche of 1,00,000 Cr focused on Infrastructure Companies with minimum investment grade rating to help power sector companies 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.

  1. Low Cost Infrastructure Sector Funding by Development Financial Institutions:

Since infrastructure assets need long term pay off, they cannot be financed by the short-term liabilities of commercial banks. Large concentrated exposures in banks have underscored the need for alternatives such as modern autonomous Development Finance Institution (DFI) for long-term finance. 

Suggestion: The proposed Development Finance Institution to fund infrastructure projects may be hastened to solve the infrastructure financing needs of the country. Further, for the proposed DFI, the Govt should allow for a separate Credit Rating system, Expected Loss Method (ELM), which was evolved by a govt. appointed committee for infrastructure projects, needs to be adopted by CRAs as also lenders for rating of infrastructure projects and also for capital provisioning. 

  1. Incentivising Banks to lend to Infrastructure Sector:

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 and the long life of such projects. Such criterion makes it difficult for banks to fund power sector investments making banks reluctant to fund the investment. The power sector needs investments of around Rs 50,000 crore to meet the new environment rules for coal-based power plantsfor the remaining 120 GW of power plants which are yet to place FGD equipment orders.

Suggestion:  GoI can consider lowering of Risk Weights for Calculations of Capital Charge for Credit Risks from 100% to 50% 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. 

Also to incentivize local manufacturers like BHEL, L&T and implement ‘Atmanirbhar Bharat’ in power sector, GoI 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.

  1. Light Touch Approach for Re-structuring:

RBI’s tightening of NPA recognition norms, needs to be re-examined to see if a lighter approach can be adopted for infrastructure sector to differentiate between a “good” borrower & a “wilful defaulter’’. 

Suggestion: We request to allow one-time restructuring of all accounts, which were ‘standard’ (i.e. overdue less than 90 days) as on 1st Mar’20, & also permitting bilateral restructuring without insisting for Inter Creditor Agreement & escrow mechanism.