Business Daily from THE HINDU group of publications
Thursday, Sep 07, 2006
Business Daily from THE HINDU group of publications Thursday, Sep 07, 2006 |
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Money & Banking - Credit Market Easier exposure limit for infrastructure lending sought C. Shivkumar
Fear over funding Banks are permitted credit exposure of 15 and 40 per cent of capital funds to single and group borrowers, respectively with an additional allowance of 5 and 10 per cent, respectively. The limits did not apply to loans fully guaranteed by the Government. None of the five super thermal mega projects are expected to be supported by sovereign guarantees.
Bangalore , Sept. 6 Faced with the large funding requirements for the proposed super mega power projects, banks and financial institutions have sought further liberalisation in the exposure limits for infrastructure lending. Banking sources said that the debt-funding requirement for each of the projects would be in excess of Rs 10,000 crore. This is on the basis of the project cost of Rs 15,000 crore for each of the proposed five 4,000-MW projects and a debt to equity ratio of 70:30. This implies that the total debt-financing requirement would be in excess of Rs 50,000 crore. The projects, Sassan Power Ltd in Madhya Pradesh, Coastal Andhra Power Ltd, Coastal Gujarat Power Ltd, Coastal Karnataka Power Ltd, and Maharastra Ultra Mega Company Ltd are still in the bidding stage. At least in three projects, the draft power purchase documents are ready.
Exposure limits
Bankers said that for meeting the funding requirements for the proposed super mega projects and funding of new projects by the State generation companies, public sector utilities such as National Thermal Power Corporation and Neyveli Lignite Corporation, the existing exposure limits prescribed by the RBI were inadequate. This is even after assuming that all the funding would have to be done through consortium basis. One public sector banker said, "Funds are not the problem, but the guidelines need to be revised." Currently, banks are permitted credit exposure of 15 per cent and 40 per cent of capital funds to single and group borrowers, respectively with an additional allowance of 5 per cent and 10 per cent, respectively for infrastructure sector. The limits however, do not apply to loans fully guaranteed by the Government. However, bankers said that this limit was inadequate since none of the five super thermal mega projects are expected to be supported by sovereign guarantees. The only comfort that the bankers are likely to bet is in the form of bankable power purchase agreements, backed by a three-tier payment security mechanism, that involves a letter of credit, an escrow account mechanism up to 1.25 times the outstanding billing and probably a funded guarantee by the State Government.
Funded guarantee
In addition, bankers said, that some of the group exposure limits would also need to be changed, especially in cases where the payment security mechanism is supported by the funded State Government guarantees. Funded guarantee implies that the State Government make provisions in their respective budgets in the form of a redemption fund or assign a portion of their Central transfers for meeting contingent obligations. Bankers said that although project promoters had the flexibility to source external commercial borrowing bypassing the exposure norms, few are interested. This is because of tariff implications.
Combined tariff
The projects are targeting a combined (fixed plus variable) tariff of under Rs 2 a unit. However, foreign exchange fluctuations, it is feared could adversely impact these projects. This is because exchange rate fluctuations are treated as pass through items for fixing power tariffs. Consequently, the preference is only for rupee funding, where the power tariff volatility could be considerably minimised.
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