The Centre’s recent ₹90,000-crore liquidity line will help State power distribution companies (discoms) settle a significant portion of their overdue bills to generating companies (gencos).

However, with weak power demand and high cash losses amid the pandemic, discoms would end up owing lenders a staggering ₹4.5-lakh crore by the end of this fiscal, or 30 per cent more than last fiscal, according to Crisil.

Such a material increase in debt would deteriorate the credit profiles of discoms and make structural reforms critical to their sustainability, a study of 34 State discoms from 15 States, which account for over 80 per cent of India’s power demand, shows.

Today, only one in five discoms is capable of servicing debt through its own cash flows and budgeted subsidies. The scenario will worsen this fiscal because of weak demand for power, which comes on the back of an already low base of last fiscal, rising costs, and losses caused by the lockdown, said the report.

Manish Gupta, Senior Director, Crisil Ratings, said: “Higher costs and constrained cash inflows amid declining demand mean the per-unit operating gap of discoms will widen to 83 paise per unit by the end of this fiscal. In other words, cash losses this fiscal may almost double to ₹58,000 crore over last fiscal, despite higher subsidy support from State governments.”

Lockdown impact

Power demand fell a fifth year-on-year in April and May combined. While there are signs of a gradual recovery, all-India power demand could be lower by 2 per cent, or 31 billion units, this fiscal because industrial and commercial consumers, who pay 50-100 per cent more and cross-subsidise domestic and agricultural consumers, have been the worst hit by the lockdown.

Moreover, collections will be under pressure as discoms have allowed consumers across categories to defer payments and not all the dues may be recouped, with the economy staring at a recession.

The pandemic-driven losses would further scar the indebted balance sheets of discoms.

While the additional debt line of ₹90,000 crore from Power Finance Corporation and REC can reduce overdues to gencos, this would be a temporary stitch at best, said Crisil.

The higher cash losses could lead to payables re-inflating sans incremental funding or state support, Crisil added.

Some of the Centre’s recent initiatives, such as reduction of discom receivables from State entities as part of a loan package, the move towards cost-reflective tariffs, and privatisation, are steps in the right direction. However, all these would require a clean-up of legacy debt, removal of cross-subsidies and, more importantly, enhanced commercial orientation of discoms.

Those would be the key monitorables in the next expected reforms package, the report said.