Government support steps would only provide a temporary lifeline for state-owned power distribution companies, as the coronavirus pandemic has intensified liquidity pressure for these firms, said Standard & Poor's (S&P) Global Ratings Agency.
On 13 May, Union Finance Minister Nirmala Sitharaman declared that state-owned lenders PFC and REC will extend Rs 90,000 crore in state-guaranteed loans to government-owned discoms, which owe nearly Rs 94,000 crore to power generation and transmission companies.
"Discoms have been the key structural weakness for the Indian power industry for decades. State government-guaranteed loans could help these companies clear overdue payments, releasing cash to the generation and transmission companies," S&P Global Ratings credit analyst Abhishek Dangra said.
He also noted that a sustainable approach to poor credit fitness, excess debt, and high pain losses is crucial to preventing the need for additional packages, particularly post-COVID-19.
The Agency noted that many discomforts in India have poor financial health due to over-debt, loss-making and high transmission and distribution (T&D) losses of more than 15%.
"The COVID pandemic exposes them to additional shock mainly on the back of fall in power demand by 20-30 percent during the nationwide lockdown, high power purchase obligations, with fixed capacity charge payments for conventional power and the must-run status of renewable energy and lower collection from end customers due to disruption in cash collection centres and payment relief to industrial and commercial customers," it said.
The Agency expects to recover power demand, but is expected to have its first-ever power surplus in the fiscal year ending March 2021.
S&P further noted that the expansion of PFC 's consolidated loan portfolio by around 15% as a result of the power sector relief will strain its capitalization.
"We believe the risks in PFC's consolidated loan book remain related to the structure of the power sector. However, we believe PFC's capital position can absorb the impact. As discoms pay dues to transmission and generation companies, the latter could use some of the cash flows to meet their existing obligations to PFC and REC," credit analyst Michael Puli said.
Another researcher, Yee Farn Phua, argued that, as distress is likely to continue to depend on funding from state governments due to their unstable capital structures, these states' fiscal measures to mitigate the pandemic effect and stabilize the economy, coupled with a decline in operating revenues, could undermine the budgetary performance indicators of these countries.
The risks to economic recovery and thus the budgetary position of the Member States should remain high for the next one to two years, and thus their credit profiles and capacity to support weaker discomforts may be under stress, he said.
"Although the headline Rs 90,000 crore package appears large, it amounts to just about 0.4 percent of GDP. But the increased debt burden on state governments will not significantly weaken our assessment on their credit quality. A protracted economic downturn remains the biggest risk to credit metrics of Indian state governments," Phua added.
Whereas, the state-run NTPC and Power Grid Corporation have been ordered by the government to waive around Rs 3,000 crore in fixed charges for non-discomfort electricity.
