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TMCNet:  Corporate affairs ministry to alter accounting norms for preventing NPAs in power firms [India Business] [Times of India]

[January 25, 2014]

Corporate affairs ministry to alter accounting norms for preventing NPAs in power firms [India Business] [Times of India]

(Times of India Via Acquire Media NewsEdge) NEW DELHI: The government is set to announce changes in accounting standards to allow power companies to provision for their cost of interest payments according to the units produced rather than the entire projects, a measure aimed at preventing the units yet to be commissioned from turning into non-performing assets . The corporate affairs ministry will shortly issue a circular to this effect, a senior ministry official told ET, adding that the existing norm had put a tremendous burden on the power companies as well as the banks that have exposure to the sector. Brokerages have pegged the exposure of banks to the power sector at close to Rs 6 lakh crore at the end of 2012-13.


More than 10,000 MW of power projects are ready for commissioning but are stranded because of fuel supplies shortages. "Capitalisation of costs must take into account only units of power produced commercially," said the official, requesting anonymity. Therefore, only the commissioned units of a multi-unit project will be considered for capitalisation of costs. For example, if a power producer has taken a loan for a project worth Rs 100 crore with an interest outgo at 10% and the project is divided into five phases , the capitalisation of interest cost after the completion of the first phase will be on Rs 8 crore.

The entire Rs 10 crore of interest payment cannot be charged to profits of the company. "It is a relief for power companies as banks will not chase them any more out of fear of NPAs," said Ashok Khurana, director general of Association of Power Producers. This will have a positive impact on the companies' balance sheets as well, he added. The move comes after intense lobbying by power producers and worry within various sections of the government over large loans to the sector turning into NPA due to delay in signing of fuel supply agreements. The finance ministry had pushed for expeditious finalisation of fuel supply agreements, highlighting the risk posed to the banking system due to large exposure of banks to the sector. Although some agreements have been finalised, power companies are still under financial stress and struggling to reach full capacity. In such a situation, large provisioning would only complicate the matters further.

The Centre is attempting to break the logjam in project clearances and implementation through Cabinet Committee on Investments and Project Monitoring Group. "It was clearly a problem for power sector. The fear of NPAs had been more for gas-based projects as clearly there is less gas produced from KG basin, hence less supplied," said Kameshwara Rao, leader-energy at PwC India. Power producers had wanted a change in the Accounting Standards 10 and 16 to allow provisioning of capitalisation of borrowing cost for the stranded power units.

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