New Delhi, Feb. 10: The Centre is mulling deduction of a portion of Jharkhand's proposed funds for 2013-2014 for the latter's failure to repay its dues to power giant Damodar Valley Corporation (DVC), a decision that could spell a major setback for the cash-strapped debtor state.

The state, which owes DVC around Rs 5,500 crore in outstanding electricity bills, will be asked to give up around Rs 2,350 crore of the Centre's outlay towards repaying its debts, highly placed sources said.

"I attended a recent meeting with senior officials of Planning Commission, power and finance ministries and DVC representatives. The Centre is all set to deduct from our funds package this year to settle bills of the power firm," a senior Jharkhand bureaucrat, requesting anonymity, told The Telegraph.

He added the Centre might also put in a condition that electricity would be supplied against full payment.

"It will be a major setback for the state and hamper our already straitened financial condition. Chances of any leverage seem bleak," the official added.

Though the Centre and DVC maintain Jharkhand owes the latter a mammoth Rs 5,500 crore, state power secretary V.K. Singh said it had been "reconciled" to a much lower Rs 1,850 crore.

"We held a meeting with top DVC officials and the total dues have now been reconciled at Rs 1,850 crore," said the state power secretary.

Singh added that Rs 200 crore had been repaid to DVC in the past week. A letter detailing the time plan in which Jharkhand intends to clear the outstanding amount had also officially been sent to the corporation.

"We have also agreed to a letter of credit at 105 per cent on monthly basis now onwards to ensure arrears don't mount on outstanding dues. Since we have proactively taken these initiatives, there is no reason why our plan size should be cut," said Singh.

But Jharkhand's financial mess is causing the DVC to bleed. According to sources, on an average, Rs 79 crore worth of dues from the state piles up every month. Around Rs 1,000 crore of revenue remains unrealised every year since 2005-2006. In terms of cash flow, almost the entire 16 per cent margin granted by the electricity tariff regulator is never realised.

DVC also has to finance social responsibility initiatives such as flood control measures and irrigation schemes, which add up to a net deficit of Rs 50 crore per annum, said a corporation functionary.

A cash-strapped DVC refinances working capital gap through short-term credits spanning between nine and 12 months from a host of commercial banks, including State Bank of India.

"DVC has to clear around Rs 1,100 crore of such loans between March and June. But we are left with hardly any cash to fulfill repayment commitments. Defaulting payments may not just create non-performing assets in banks, they will also our impact loan disbursements for ongoing projects," the official added.