MUMBAI: The Reserve Bank of India has said the mounting losses of state power utilities (SPUs) is a growing problem for finances of state governments which have issued guarantees and agreed to foot subsidy bills.
SPUs are making huge cash losses due to non-revision of rates over extended periods of time and non-realisation of subsidies from the governments concerned. They’ve increasingly financed their losses through short-term borrowings from banks and other financial institutions. These borrowings have assumed alarming proportions, RBI said.
State governments provide budgetary support to SPUs through subsidies, grants and loans. They have also extended guarantees for loans taken by the utilities from financial institutions.
“The deterioration in financial performance of SPUs is expected to have significant implications for the finances of states,” RBI said in its report, ‘State finances: A study of Budgets of 2011-12’.
The banking regulator said power sector reforms and the unbundling of power utilities have not had the desired impact on the financial position of power utilities or the state governments. It sought improvement in disclosures on unpaid bills (subsidies) and guarantees invoked. Arrears on subsidy are not captured in state budgets, as these follow cash accounting as opposed to accrual-based accounting, RBI noted.
The information on unpaid subsidies, loans extended against government guarantees and letters of comfort and guarantees invoked should be transparently reported by states, it said.
The gap between the average cost of supply and average revenue (with and without subsidy) realised has widened in several states as rate revisions to close the gap do not take place regularly.
With SPUs borrowing from banks and financial institutions to cover the losses, these accumulations and interest payments add substantially to the average cost of supply. Creating further pressure on the SPUs’ financial position.
The share of loans from the states as a proportion of borrowings of power utilities and subsidy realised have declined in recent years. But, the increase in state government guarantees to these utilities has increased the contingent liabilities of states.
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