Liquidity in the Power Sector 

#GS2 #Governance 

The Cabinet Committee on Economic Affairs has approved a one-time relaxation to Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) for extending loans to Distribution Companies (DISCOMs) above limits of working capital cap of 25% of last year’s revenues, under the Ujwal DISCOM Assurance Yojana (UDAY). 

What is the need for loan extension? 

  • The outbreak of the global pandemic COVID-19 in the country and the consequent nationwide lockdown has exacerbated the liquidity problems for the power sector. 
  • Revenues of the power distribution companies have nosedived as people are unable to pay for the electricity consumed while power supplies, being an essential service, have been maintained.  Energy consumption has decreased substantially. 
  • The liquidity of the power sector is not expected to improve in the short term, as economic activity and power demand will take some time to pick up. There is, thus, an immediate need to infuse liquidity in the power sector for continuation of power supply. 

What is UDAY scheme? 

  • Ujwal DISCOM Assurance Yojana aimed to provide financial and operational turnaround of power distribution companies and aimed at long term affordable and accessible 24×7 power supply to all. 
  • It had a target of making all DISCOMs profitable by 2018-19 through four initiatives such as improving operational efficiencies of DISCOMs, reduction of cost of power, reduction in interest cost of DISCOMs, enforcing financial discipline on DISCOMs through alignment with state finances. 
  • Under this programme, States had to take over 75% of DISCOM debt over two years i.e 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17. 
  • States were to issue non-SLR including SDL bonds (state development loans) in the market or directly to the respective banks / financial institutions (FIs) holding the DISCOM debt to the appropriate extent. 
  • DISCOM debt not taken over by the state were to be converted by the banks / FIs into loans or bonds. 
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