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Home Blogs With already looming debt burden on power companies, will PSBs give in to Government’s demand?

With already looming debt burden on power companies, will PSBs give in to Government’s demand?

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The discoms have been under contant financial strain and there are umpteen cases where they have not been able to service their dues to the lenders. Recently, the Centre agreed to provide a loan relief for ailing power distribution companies (discoms) of Rs 1.5 lakh crore. However, it was decided that this time the state governments and the utilities take over the entire burden of Rs 1.5 lakh crore, instead of banks taking over half the liability.
 
The lenders, government and the power sector today are paying the price of overoptimistic projections. While making projections several promoters did not account for rise in coal price and undertook aggressive bidding for these projects. It suited their purpose then because all of them had to raise huge amounts of cash from the public. Based on their faulty assumption of low coal prices, these companies agreed to sell power to state electricity boards (SEBs) at very low tariffs. However, the year 2007 witnessed steep rise in coal prices defunct operations at many units. Today, more than the issue of raising tariffs, uncertainty in coal supplies is a big factor casting a shadow on the operationalisation of these projects and their future profitability before they are able to service their debt. Besides raw material concerns, the financial health of SEBs and their inability to pay for electricity supplies is a serious cause for worry among the lender banks. 
 
In such a scenario extending fresh loans to upcoming power projects makes less business sense for public sector banks. The bigger question is why public sector banks (PSB) are exploited to fulfil government agendas? We all will agree to the fact that these banks run on commercial basis with one agenda - to earn profit. However, they seem to face constant nudging from the government to provide compulsory loan to the ailing agriculture sector. Again, agriculture debts are periodically written off at the government’s behest.  If we retrospect just a couple of months, startling cases of loan restructuring have been approved by the state owned banks. Total loan restructuring has notched upto Rs 2 lakh crore over the last two months, including Rs 35,000 debt relief for textile mills and Rs 18,000 crore for ailing Air India, with demand from several others, including private airlines, pending with lenders.  
 
How long will these banks be able to sustain the pressures of provision of fresh loans to financially strapped sectors, rising bad loans, loan restructuring and yet make profits is to be seen in the coming years. 

 

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