The power ministry’s order for implementing letter of credit payment security mechanism would face implementation challenges but could improve predictability of cash flows for generating companies in the long term, India Ratings and Research said.
Distribution companies (discoms) would have to create LC for about Rs 30000 crore before August 2019, if the circular has to be implemented.
Clarity on payment of existing dues is still awaited. Additionally, given the erratic payment behaviour of discoms, banks could issue LCs subject to 100% margin back–up. The standalone credit profiles of several discoms are frail; therefore, LC issuance by a bank could be a litmus test for discoms, the ratings firm said.
While the insistence on establishing LC could create credit discipline in the long term, it is vital for discoms to address the issue of mounting payment delays. Read More
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