Financial institutions (FIs) and banks funding private power projects want the Union power ministry to amend Power Finance Corporation's (PFC) articles of association whereby the corporation will not be able to withdraw funds from state electricity boards in the event of default. At present, in the event of an electricity board defaulting, PFC has the first right over the finances of the board, implying that the state government will have to first repay PFC's outstanding dues before it meets other obligations.
In fact, under the Electricity (Supply) Act, the boards have to first meet obligations to organisations like Coal India Ltd and NTPC before they meet other requirements. FIs and banks are of the opinion that unless PFC's first-charge clause in dropped or amended, they will find it difficult to fund private power projects.
PFC is one of the largest lenders to electricity boards and has a current outstanding bill of around Rs 7,000 crore from them. FIs and banks feel that with such heavy outstandings they will find it difficult to find a project that has an assured stream of income. They feel that even with an escrow guarantee, which ensures a basic cash flow to the project, lenders will still be reluctant because PFC has first claim over the boards' finances.
Given the poor financial health of the electricity boards, states have been unable finalise power purchase agreements with project promoters because they are unable to secure an assured cash flow. Bankers pointed out that even if a project has an escrow guarantee, the promoter or lender will not have a right to draw down the escrow account in the event of a default until the board fully meets its dues to such as PFC and Coal India Ltd.