The power ministry has asked State Bank of India to tighten lending norms for distribution companies (discoms) as their continued borrowings amid ballooning dues to creditors and losses year after year pose a threat to the stability of the financial sector.
In a recent communication to SBI chairman Diensh Kumar Khara, power secretary Alok Kumar asked the country’s largest public sector lender to implement the additional prudential guidelines that make loans contingent upon fiscal discipline of state governments in respect to timely payment of subsidy or other dues to discoms.

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The guidelines aim at making state governments accountable for subsidy or other freebies they announce, instill fiscal discipline and stop loans souring by switching off financial taps in case of wanton disregard of norms. PFC and REC, the sectoral lenders under the power ministry, have already implemented the norms.
The communication highlights a vicious cycle in the country’s distribution sector. A large number of discoms face both solvency and liquidity crunch. As their revenue gap keeps widening, discoms keep borrowing to meet working capital needs and get deeper into a never-ending debt trap.
Kumar blames the situation on shortfall in subsidy payment and unpaid electricity bills of government departments and civic bodies are largely responsible for the pathetic financial situation of discoms. He says subsidies make up 16.5% of discom revenue at the national level and ranges between 30% and 40% for some states.
Latest available data from state-run power sector lender PFC peg unpaid state subsidy amount at Rs 71,865 crore and unpaid electricity bills of government departments at Rs 52,059 crore till June.
The magnitude of the problem becomes clear if one considers overall discom debt stood at Rs 514,237 crore in 2019-20 against a turnover of Rs 728,975 crore. Not surprising then that they owe Rs 98,682 crore to Central and private sector generation companies alone till December.
This makes it obvious that the measures put in place by the government, including a Rs 3 lakh crore package, to pull discoms out of the financial morass has not had the desired result, which explains the need for all lenders to tighten lending norms for discoms.
Broadly, these measures entail financial support contingent and directly proportionate to meeting clearly defined reforms milestones by discoms. Based on the improvement trajectory, the discoms have also been allowed additional borrowing with a ceiling of 0.5% of SGDP (state’s gross domestic product).