The Hindu Business Line : State-owned power units turning to banks for funds

Bangalore, Sept 9 State-owned power producers are switching to the banking sector for sourcing project funds, in view of high interest rates from specialised funding agencies.

Banks, the sources said, were prepared to offer fixed or floating rate funds on finer terms than funding institutions such as Power Finance Corporation or Rural Electrification Corporation. Both PFC and REC had recently revised their lending rates. PFC’s lending rates for generation projects go up to 12.5 per cent for State-owned projects. REC’s lending rates were also identical.

The sources said some large banks were prepared to offer funds at as low as 11.5 per cent for State-owned projects. Most of the banks were offering floating rate terms to intending borrowers, the sources said.

Cost of funds

The specialised institutions loans are mostly fixed rate offerings with reset covenants every three years. One reason for the low price for the banking sector was the lower weighted average cost of resources, at around 8 per cent. This was after factoring in the costs of reserve ratios, Cash Reserve Ratio and the Statutory Liquidity Ratio.

But institutions’ cost of resource was considerably higher. Both PFC and REC had recently raised funds through bond offerings priced at around 10.9 per cent, despite their +AAA+ rated status. The bonds were mostly picked up the insurance companies, in particular the Life Insurance Corporation of India and some mutual funds. Banks on the other hand have a large portfolio of low cost funds — current and savings accounts, comprising at least 30 per cent of their overall deposits.

Among the institutions looking to the banking sector for funds are large stand-alone generation entities such as the Karnataka Power Corporation Ltd. The sources said, assuming a debt to equity ratio of 80:20, high interest costs translated into high tariffs. High tariffs in turn raised project viability risks, the sources said.

High tariffs

At current interest rates, after assuming an a return on equity of 14 per cent, tariffs from thermal projects were likely to far closer to Rs 3 a unit, way above the ceiling of Rs 2 a unit recommended by the Ministry of Power.

Since project promoters had little control on fuel prices, the only option was to contain funding costs, the sources. Besides, the sources said, with the banking sector migrating to the Basel II regime, well rated entities were in a position to obtain even finer rates. Moreover, there were also options of cross border funds, in the form of external commercial borrowings. But, the sources said that the spreads were still very high.

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