PFC, REC to offer concessional loans for distribution companies

The government is working on a package to offer loans to state power distribution companies

Power Finance Corporation, REC, Medium-term concessional loans, State electricity distribution companies, State governments, Easing FRBM limits, Infusing liquidity in the power sector, Coronavirus pandemic, Union Cabinet, Loans to state power distribution companies, Prevent blackouts, Severe liquidity crisis

The Power Finance Corporation (PFC) and REC will offer medium-term concessional loans with two-year moratorium to state electricity distribution companies, which will be backed by budgetary support from state governments. This will require easing FRBM limits for some states that have breached their borrowing limits.

The proposal, aimed at infusing liquidity in the power sector amid the coronavirus pandemic, has met in-principle nod from top authorities and will soon be put forth in the Union Cabinet.

The government is working on a package to offer loans to state power distribution companies to help them clear select dues of electricity generation plants to prevent blackouts as the projects face a severe liquidity crisis.

Currently, banks and financial institutions can lend only 25% of a discom’s revenue in the previous year as working capital. The borrowing limits of the PFC and REC are also likely to be enhanced accordingly. The loans will be given for a period of seven to 10 years and come with a moratorium of two years during which the interest will be paid. Such loans will help infuse liquidity in the distribution and generation space of the power sector.

Depending on the margins, the loans can be given at atleast a concession of 4-5%. The loans will be secured with state government guarantees along with budgetary support under the state budget.

As per the plan, the PFC and REC will raise funds from the market for lending at concessional rate to power distribution companies for clearing dues to power plants. The financiers will pay the power plants on behalf of the distribution discoms and these will show as debt on the books of discoms.

The states will have to agree to undertake commercial loss reduction trajectories, prepare proper energy accounting systems and action plans to reduce financial losses and bring in operational efficiencies. PFC might have to set aside its stringent prudential norms that were recently revised with company board’s approval.

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