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C. Shivkumar

BANGALORE, June 30

WORRIED over the deteriorating quality of payment security mechanisms offered by the State Government-owned power utilities, lending agencies such as Rural Electrification Corporation Ltd (REC) and Power Finance Corporation (PFC) have now begun insisting on a physical asset cover.

Sources said that besides the falling inflows into the escrow account, one of the main causes of the deterioration was the high rising transmission and distribution losses prevailing in the States.

The sources said that most of these inflows are chosen through a cherry-picking exercise by the lending agencies. For instance, the best revenue circles are chosen and payments made by these customers are earmarked for servicing of the loans made by the lending agencies.

But the sources said, in many of the States, especially in the southern region, the rate of industrial sickness was increasing.

Consequently the quality of high-tension receipts had also deteriorated. This, in turn, implies defaults in payment of electricity dues.

Besides in States such as Karnataka, there was a flight from the grid on account of high electricity charges by the utilities.

Flight from the grid in Karnataka by high-tension users is estimated to be in the region of at least 400 MW. Further HT customers, mainly industrial units, are reducing investments in States where power supply is erratic. This impairs revenue receipts growth of the State utilities.

The grid flight is usually in the form of reducing offtake from the grid and switching over to alternative energy sources.

One source that the HT customers are switching over to is captive generation. Captive generation in Karnataka is equivalent to almost three fourths of capacity of the State generating utilities, or close to about 2,500 MW, mostly by way of liquid fuel or alternative fuel generators including bagasse.

Still other prime customers such as the Indian Railways are entering into direct power purchase contracts with generating companies such as the National Thermal Power Corporation.

And the railways have been the best customers of the State electricity utilities.

Lenders have often cherry-picked railways payments to the power utilities as part of the escrow inflows. This, in turn, had weakened the existing revenue receipts position of the State utilities, the sources added.

The sources said, ``any payment security mechanism is based on the underlying assumption that the customer remains permanent at least during the debt-servicing period. And if high quality inflows stop flowing into escrow account, the credit risk actually escalates.''

Consequently, the remedial measures that are now being put in place include equitable mortgage of the assets or physical asset cover. This physical asset cover is based on 150 per cent of the loan value.

However, in this case, the sources said, the valuation was not done on the basis of the depreciated value of the assets. If this method were adopted then, the funds available to borrowers would also drop.

Instead, the sources said, the assets are valued on the basis of the replacement cost value. This mechanism also enhanced the borrowers eligibility criteria, they added.

In the event of defaults, the charge on the asset is with the lender, who can technically liquidate the asset to recover dues.

Besides, lenders are also working out methods of additional cushioning of the escrow-revenue assignments. Currently, escrow inflows are the equivalent of about 1.25 times the debt service dues. But some of the lenders are insisting on additional cushioning as high 1.75 times the debt servicing dues, so as to mitigate the risks.

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