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Last week, the Power Finance Corporation reported that state-owned power distribution companies across the country made financial losses amounting to Rs 68,832 crore in 2022-23. This is four times higher than the losses witnessed in 2021-22, and roughly equivalent to the annual budget of a state like Uttarakhand. This blog examines some of the causes and implications of such losses.
Overview of financial losses
For several years now, electricity distribution companies (discoms), which are mostly state-owned, have witnessed steep financial losses. Between 2017-18 and 2022-23, losses accumulated to over three lakh crore rupees. In 2021-22, discom witnessed substantial reduction in their losses, primarily because states released 1.54 lakh rupees in subsidies to clear pending dues. State governments provide discoms with subsidies, so that domestic and agricultural consumers receive affordable power. These payments are typically delayed which creates cash flow constraints, and leads to an accumulation of debt. In addition, costs incurred by discoms in 2021-22 remained unchanged.
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
As of 2022-23, losses have increased again to reach Rs 68,832 crore. This increase has been driven by rising costs. At a per unit level, the cost of supplying one kilowatt of electricity rose from 7.6 rupees in 2021-22, to 8.6 rupees in 2022-23 (See Table 1).
Table 1: Financial details of state-owned power distribution companies
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
Per unit loss (ACS-ARR) |
0.6 |
0.6 |
0.3 |
0.7 |
Total losses (in Rs crore) |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
Purchase of electricity from generation companies (gencos) forms about 70% of a discom’s total costs, and coal is the primary source for generating electricity. The following chain of events took place in 2022-23: (i) consumer demand for electricity rose by 10% over the previous year, as compared to a 6% year-on-year increase in the past 10 years, (ii) coal had to be imported to meet the increased demand, and (iii) global coal prices were elevated.
Coal imported at elevated prices to keep up with rising electricity demand
In 2022-23, demand for electricity increased by 10% over 2021-22. Between 2008-09 and 2018-19, demand increased at an annual growth rate (CAGR) of 6%. Electricity demand grew as the economy grew (at 7%), and largely came from domestic and agricultural consumers. These consumer categories account for 54% of the total electricity sales, and their demand rose by 7%.
Sources: Central Electricity Regulatory Commission; PRS.
Electricity cannot be stored at scale, which means that generation must be scheduled depending on anticipated demand. The Central Electricity Authority anticipates annual demand for each year. It estimated that demand in 2022-23 would be at 1,505 billion units. However, the actual demand was higher than anticipated in the first few months of 2022-23 (See Figure 3).
To meet this demand, electricity generation had to be ramped up. Coal stocks had already depleted from 29 million tonnes in June 2021 to eight million tonnes in September 2021, on account of high demand in 2021-22. To ensure uninterrupted supply of power, the Ministry of Power directed gencos to import coal. The Ministry noted that without imports, widespread power cuts and blackouts would have occurred.
Sources: Load Generation Balance Report 2022 and 2023, Central Electricity Authority; PRS.
Coal imports rose by about 27 million tonnes in 2022-23. While this constituted only 5% of the overall coal used in the sector, the price at which it was imported significantly impacted the sector. In 2021-22, India imported coal at an average price of Rs 8,300 per tonne. This rose to Rs 12,500 per tonne in 2022-23, a 51% increase. Coal was primarily imported from Indonesia, and prices shot up due to the Russia-Ukraine war, and demand surge by countries like India and China.
Sources: Ministry of Power; Ministry of Statistics and Programme Implementation; PRS.
Coal import situation going forward
In January 2023, the Ministry of Power advised gencos to import 6% of the required coal, to ensure sufficient stock until September 2023. It noted that due to floods and variable rainfall in various parts of the country, hydro generation capacity reduced by about 14%. This put additional burden on coal based thermal generation in 2023-24. Following this, in October 2023, the Ministry directed all gencos to continue using at least 6% imported coal until March 2024.
Sources: Ministry of Coal; PRS.
Structural issues in the power sector and its impact on state finances
Discoms witness persistent financial losses due to certain structural issues. Their costs are typically high because of old contracts with generation companies (gencos). Power purchase costs in these contracts do not account for production efficiencies over the years, and costs remain unchanged. Tariffs are only revised every few years, to ensure that consumers are protected from supply chain shocks. As a result, costs are carried forward for a few years. In addition, discoms sell electricity to certain consumers such as agricultural and residential consumers, below cost. This is supposed to primarily be recovered through subsidy grants provided by state governments. However, states often delay subsidy payments leading to cash flow issues, and accumulation of debt. In addition, tariff recovery from the power sold is not optimal.
Losses reported in the generation sector have also increased. In 2022-23, state-owned gencos reported losses worth Rs 7,175 crore, as compared to the Rs 4,245 crore in 2021-22. Rajasthan accounted for 87% of these, at Rs 6,278 crore. Note that under the Late Payment Surcharge Rules, 2022, discoms are required to make upfront payments to gencos.
Risk to state finances
Persistent financial losses, high debt and guarantees extended by states continue to pose a risk to state finances. These are contingent liabilities for state governments, i.e., in the event a discom is unable to repay its debt, the state would have to take it over.
Several such schemes have been introduced in the past to bail discoms out (See Table 2). As of 2022-23, discoms have an outstanding debt worth Rs 6.61 lakh crore, 2.4% of the national GDP. Debt is significantly high in states such as Tamil Nadu (6% of GSDP), Rajasthan (6% of GSDP), and Uttar Pradesh (3% of GSDP). Previous Finance Commissions have recognised that strengthening discom finances is key in minimising the risk to state finances.
Table 2: Key government schemes for the turnaround of the distribution sector over the years
Year |
Scheme |
Details |
2002 |
Bailout Package |
States take over the debt of state electricity boards worth Rs 35,000 crore, 50% waiver of interest payable by state electricity boards to central PSUs |
2012 |
Financial Restructuring Package |
States take over 50% of the outstanding short-term liabilities worth Rs 56,908 crore |
2015 |
Ujwal Discom Assurance Yojana (UDAY) |
States take over 75% of the debt of discoms worth Rs 2.3 lakh crore and also provide grants for any future losses |
2020 |
Liquidity Infusion Scheme |
Discoms get loans worth Rs 1.35 lakh crore from Power Finance Corporation and REC Limited to settle outstanding dues of generators, state governments provide guarantee |
2022 |
Revamped Distribution Sector Scheme |
Central government to provide result-linked financial assistance worth Rs 97,631 crore for strengthening of supply infrastructure |
Sources: NITI Aayog, Press Releases of the Ministry of Power; PRS.
For more details on the impact of discom finances on state finances, see here. For more details on structural issues in the power distribution sector, see here.
ANNEXURE
Table 3: Cost and revenue structure of discoms on energy sold basis (in Rs per kw)
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
of which |
||||
Cost of procuring power |
5.8 |
5.9 |
5.8 |
6.6 |
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
of which |
||||
Revenue from sale of power |
5.0 |
4.9 |
5.1 |
5.5 |
Tariff subsidy |
1.3 |
1.4 |
1.4 |
1.5 |
Regulatory income and revenue grant under UDAY |
0.3 |
0.1 |
0.0 |
0.2 |
Per unit loss |
0.6 |
0.6 |
0.3 |
0.7 |
Total financial losses |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Sources: Power Finance Corporation reports for various years; PRS.
Table 4: State-wise profit/loss of power distribution companies (in Rs crore)
State/UT |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Andaman and Nicobar Islands |
-605 |
-645 |
-678 |
-757 |
-86 |
-76 |
Andhra Pradesh |
-546 |
-16,831 |
1,103 |
-6,894 |
-2,595 |
1,211 |
Arunachal Pradesh |
-429 |
-420 |
NA |
NA |
NA |
NA |
Assam |
-259 |
311 |
1,141 |
-107 |
357 |
-800 |
Bihar |
-1,872 |
-1,845 |
-2,913 |
-2,966 |
-2,546 |
-10 |
Chandigarh |
321 |
131 |
59 |
79 |
-101 |
NA |
Chhattisgarh |
-739 |
-814 |
-571 |
-713 |
-807 |
-1,015 |
Dadra & Nagar Haveli and Daman & Diu |
312 |
-149 |
-125 |
NA |
NA |
NA |
Delhi |
NA |
NA |
NA |
98 |
57 |
-141 |
Goa |
26 |
-121 |
-276 |
78 |
117 |
69 |
Gujarat |
426 |
184 |
314 |
429 |
371 |
147 |
Haryana |
412 |
281 |
331 |
637 |
849 |
975 |
Himachal Pradesh |
-44 |
132 |
43 |
-153 |
-141 |
-1,340 |
Jharkhand |
-212 |
-730 |
-1,111 |
-2,556 |
-1,721 |
-3,545 |
Karnataka |
-2,439 |
-4,889 |
-2,501 |
-5,382 |
4,719 |
-2,414 |
Kerala |
-784 |
-135 |
-270 |
-483 |
98 |
-1,022 |
Ladakh |
NA |
NA |
NA |
NA |
-11 |
-57 |
Lakshadweep |
-98 |
-120 |
-115 |
-117 |
NA |
NA |
Madhya Pradesh |
-5,802 |
-9,713 |
-5,034 |
-9,884 |
-2,354 |
1,842 |
Maharashtra |
-3,927 |
2,549 |
-5,011 |
-7,129 |
-1,147 |
-19,846 |
Manipur |
-8 |
-42 |
-15 |
-15 |
-22 |
-146 |
Meghalaya |
-287 |
-202 |
-443 |
-101 |
-157 |
-193 |
Mizoram |
87 |
-260 |
-291 |
-115 |
-59 |
-158 |
Nagaland |
-62 |
-94 |
-477 |
-17 |
24 |
33 |
Puducherry |
5 |
-39 |
-306 |
-23 |
84 |
-131 |
Punjab |
-2,760 |
363 |
-975 |
49 |
1,680 |
-1,375 |
Rajasthan |
-11,314 |
-12,524 |
-12,277 |
-5,994 |
2,374 |
-2,024 |
Sikkim |
-29 |
-3 |
-179 |
-34 |
NA |
71 |
Tamil Nadu |
-12,541 |
-17,186 |
-16,528 |
-13,066 |
-9,130 |
-9,192 |
Telangana |
-6,697 |
-9,525 |
-6,966 |
-6,686 |
-831 |
-11,103 |
Tripura |
28 |
38 |
-104 |
-4 |
-127 |
-193 |
Uttar Pradesh |
-5,269 |
-5,902 |
-3,866 |
-10,660 |
-6,498 |
-15,512 |
Uttarakhand |
-229 |
-808 |
-323 |
-152 |
-21 |
-1,224 |
West Bengal |
-871 |
-1,171 |
-1,867 |
-4,261 |
1,045 |
-1,663 |
State Sector |
-56,206 |
-80,179 |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Dadra & Nagar Haveli and Daman & Diu |
NA |
NA |
NA |
242 |
148 |
104 |
Delhi |
109 |
657 |
-975 |
1,876 |
521 |
-76 |
Gujarat |
574 |
307 |
612 |
655 |
522 |
627 |
Odisha |
NA |
NA |
-842 |
-853 |
940 |
746 |
Maharashtra |
NA |
590 |
1,696 |
-375 |
360 |
42 |
Uttar Pradesh |
182 |
126 |
172 |
333 |
256 |
212 |
West Bengal |
658 |
377 |
379 |
398 |
66 |
-12 |
Private Sector |
1,523 |
2,057 |
1,042 |
2,276 |
2,813 |
1,643 |
All-India |
-54,683 |
-78,122 |
-59,189 |
-77,896 |
-13,766 |
-67,189 |
Note: Minus sign (-) indicates loss; Dadra & Nagar Haveli and Daman & Diu discom was privatised on April 1, 2022; New Delhi Municipal Council Distribution utility has been added from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
Last month, Reserve Bank of India (RBI) released the report of the Expert Committee on Urban Co-operative Banks (Chair: Mr. N. S. Vishwanathan). In this blog, we discuss some broader issues with the functioning and regulation of urban co-operative banks (UCBs), and some of the suggestions to address these as highlighted by the committee in its report.
Need for Urban Co-operative Banks
The history of UCBs in India can be traced to the 19th century when such societies were set up drawing inspiration from the success of the co-operative movement in Britain and the co-operative credit movement in Germany. Urban co-operative credit societies, were organised on a community basis to meet the consumption-oriented credit needs of their members. UCBs are primary cooperative banks in urban and semi-urban areas. They are co-operative societies that undertake banking business. Co-operative banks accept deposits from the public and lend to their members. Co-operative banks are different from other co-operatives as they mobilise resources for lending and investment from the wider public rather than only their members.
Concerns regarding the professionalism of urban cooperative banks gave rise to the view that they should be better regulated. Large cooperative banks with paid-up share capital and reserves of one lakh rupees were brought under the scope of the Banking Regulation Act, 1949 with effect from March 1, 1966. Prior to this, such banks were regulated under the scope of state-specific cooperative laws. The revised framework brought them under the ambit of supervision of the RBI. Till 1996, these banks could lend money only for non-agricultural purposes. However, this distinction does not apply today.
The Expert Committee noted that UCBs play a key role in financial inclusion. It further observed that the focus area for UCBs has traditionally been communities and localities including workplace groups. They play an important role in the delivery of last-mile credit, even more so for those sections of the population who are not integrated into the mainstream banking framework. UCBs primarily lend to wage earners, small entrepreneurs, and businesses in urban and semi-urban areas. UCBs can be more responsive than formal banking channels to the needs of the local people.
Over the years, concerns have been raised about non-professional management in UCBs and that this can lead to weaker governance and risk management in these entities. RBI has also taken regulatory action on several UCBs. For instance, in September 2019, RBI placed Punjab and Maharashtra Co-operative Bank under restrictions on allegations of serious underreporting of non-performing assets. The bank could not grant loans, make investments or accept deposits without prior approval from RBI. While these restrictions were originally put in place for six months, the time frame was extended several times and has now been extended till December 31, 2021. In addition, low capital base, poor credit management and diversion of funds have also been issues in the sector.
Shrinking share in the banking sector
There were 1,539 UCBs in the country as of March 31, 2020, with deposits worth Rs 5,01,180 crore and advances worth Rs 3,05,370 crore. Even though 94% of the entities in the banking sector were UCBs their market share in the banking sector has been low and declining and stands at around 3%. UCBs accounted for 3.24% of the deposits and 2.69% of the advances in the banking sector. The Committee noted that state-of-the-art technology adopted by new players, such as small finance banks and fintech entities, along with commercial banks can disrupt the niche customer segment of the UCBs.
Figure 1: Growth in deposits of UCBs (in Rs crore) |
Figure 2: Growth in advances of UCBs (in Rs crore) |
Burden of non-performing assets
UCBs had the highest net non-performing asset (NNPA) ratio (5.26%) and gross non-performing asset (GNPA) ratio (10.96%) across the banking sector as of March 2020. These levels correspond to around twice that of private sector banks, and around five times that of small finance banks. The Committee noted that, as of March 2020, UCBs have the lowest level of net interest margin (difference between interest earned and interest spent relative to total interest generating assets held by the bank) and negative return on assets and return on equity.
Figure 3: Asset quality across banks (in percentage)
Sources: Report of the Expert Committee on Urban Co-operative Banks; PRS.
Supervisory Action Framework (SAF): SAF envisages corrective action by UCB and/or supervisory action by RBI on breach of financial thresholds related to asset quality, profitability and level of capital as measured by Capital to Risk-weighted Asset Ratio (CRAR). The Committee recommended that SAF should consider only asset quality (based on net non-performing asset ratio) and CRAR with an emphasis on reducing the time spent by a UCB under SAF. The RBI should begin the mandatory resolution process including reconstruction or compulsory merger as soon as a UCB reaches the third stage under SAF (CRAR less than 4.5% and/or net non-performing asset ratio above 12%).
Constraints in raising capital
The Committee also observed that UCBs are constrained in raising capital which restricts their ability to expand the business. According to co-operative principles, share capital is to be issued and refunded only at face value. Thus, investment in UCBs is less attractive as it does not lead to an increase in its value. Also, the principle of one member, one vote means that an interested investor cannot acquire a controlling stake in UCBs. It was earlier recommended that UCBs should be allowed to issue fresh capital at a premium based on the net worth of the entity at the end of the preceding year.
Listing of securities: The Committee recommended making suitable amendments to the Banking Regulation Act, 1949 to enable RBI to notify certain securities issued by any co-operative bank or class of co-operative banks to be covered under the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. This will enable their listing and trading on a recognised stock exchange. Until such amendments are made, the Committee recommended that banks can be allowed to have a system on their websites to buy/sell securities at book value subject to the condition that the bank should ensure that the prospective buyer is eligible to be admitted as a member.
Conflict between Banking Regulation Act, 1949 and co-operative laws
The fundamental difference between banking companies and co-operative banks is in the voting rights of shareholders. In banking companies, each share has a corresponding vote. But in the case of co-operative banks, each shareholder has only one vote irrespective of the number of shares held. Despite RBI being the regulator of the banking sector, the regulation of co-operative banks by RBI was restricted to functions related directly to banking. This gave rise to dual regulation with governance, audit, and winding-up related functions regulated by state governments and central government for single-state banks and multi-state banks, respectively.
2020 Amendments to the Banking Regulation Act: In September 2020, the Banking Regulation Act, 1949 was amended to increase RBI’s powers over the regulation of co-operative banks including qualifications of management of these banks and supersession of board of directors. The Committee noted that due to the amendment of the Act, certain conflicts have arisen with various co-operative laws. For instance, the Act allows co-operative banks to issue shares at a premium, but it is silent on their redemption. It noted that if any co-operative societies’ legislation provides for redemption of shares only at par, then, while a co-operative bank incorporated under that legislation can issue shares at a premium, it can redeem them only at par.
Note that on September 3, 2021, the Madhya Pradesh High Court stayed a circular released by the RBI on appointment of managing director/whole-time director in UCBs. The circular provided for eligibility and propriety criteria for the appointment of such personnel in UCBs. The petitioner, Mahanagar Nagrik Sahakari Bank Maryadit, argued that the service conditions of the managing director and chief executive officer of co-operative banks are governed by bye-laws framed under the M.P. State Cooperative Societies Act, 1960. The petition noted that co-operative as a subject falls under the state list and hence the power to legislate in the field of co-operative societies falls under the domain of the states and not the central government.
Umbrella Organisation
Over the years, several committees have looked at the feasibility to set up an Umbrella Organisation (UO) for UCBs. It is an apex body of federating UCBs. In 2011, an expert committee on licensing of new UCBs recommended that there should be two separate UOs for the sector. In June 2019, RBI granted an in-principle approval to National Federation of Urban Co-operative Banks and Credit Societies Ltd to set up a UO in the form of a non-deposit taking non-banking finance company. The UO is expected to provide information technology and financial support to its federating members along with value-added services linked to treasury, foreign exchange and international remittances. It is envisaged to provide scale through network to smaller UCBs. The report of the current Committee recommended that the minimum capital of the UO should be Rs 300 crore. Once stabilised, the UO can explore the possibility of becoming a universal bank. It can also take up the role of a self-regulatory organisation for its member UCBs. The Committee also suggested that the membership of the UO can be opened-up to both financial and non-financial co-operatives who can make contributions through share capital in the UO.
Comments on the report of the Expert Committee are invited until September 30, 2021.