Govt. of India (Union Power Ministry) has come out with UDAY scheme to help power distribution companies (DISCOMS) as well as banks which have provided loans to such companies. Total loans of banks to discoms went up to Rs. 1,60,000 crores in 2015. Due to heavy losses, many of the discoms are finding it difficult to repay loans and interest on such loans. The RBI is treating such bank loans as NPA’s creating serious problems to the banks as their provisioning requirement on such NPA loans are very heavy adversely effecting their profitablility. These discoms have both regular loans as well as restructured loans.
Under UDAY scheme, states are required to sign a tripartite agreement or MOU with the Union Power Ministry and discoms. Major portion of loan is taken over by the state govt. which is likely to raise money through bonds. For example Rajasthan is saddled with discom loss of Rs. 80,000 crores which is highest in the country . In this loss major amount is of debt payable to banks. Assuming the state takes over 75% of discom debt as prescribed in the scheme, its fiscal deficit would rise and will breach the relaxed Fiscal Responsibilities & Budget Management (FRBM) level set by centre . As per the scheme, most of the state would take it as loan at lower rate of interest which will have to be paid by discoms state will have to review the performance of discoms and exercise control on leakages of power as well chances of increasing tariff to improve the financial position of discoms.
For discoms, UDAY is an opportunity to clear their books and improve their technical and commercial efficiency. From the banks point of view, conversion of discom debts in to state loans removes the uncertainty associated with repayment. Banks would also greatly relieve from the mounting NPA’s.