Lenders put off by finances of State utilities, fuel uncertainties

Banks are cutting back on lending to the power sector. Credit growth to the power sector dipped to 13.65 per cent in May 2011 till May 2012 from 42.43 per cent in the corresponding previous period, according to RBI data.

The reason: There are few bankable projects, say bankers.

Deteriorating finances of State electricity boards, fuel uncertainties and the current procurement system are the main reasons due to which banks and financial institutions are wary of further exposure to the power sector. There are fewer bankable projects, say power industry watchers.

According to data compiled by Business Line, gross bank credit to the power sector had increased 42.4 per cent between May 21, 2010 (Rs 2,01,980 crore) and May 20, 2011 (Rs 2,87,550 crore). But, in the following year, between May 20, 2011 and May 18, 2012 (Rs 3,26,810 crore) the ailing sector saw domestic loans increasing by just 13.7 per cent.

There is silver lining only for projects for which fuel and other inputs are tied and offtake arrangements made. These projects continue to attract financing. But the environment is gloomy for most power producers.

“Banks and institutions will be cautious for at least next couple of years to take further exposure to this sector, unless there is clear sight of a solution to the fuel issues and the State electricity boards’ finances become reasonably healthy,” said Mr Debasish Mishra, Senior Director (Consulting), Deloitte in India.

In the coming months banks see pruning of exposure to discoms, as the government-designed loan restructuring package gets implemented. The package involves conversion of existing loans into bonds to be subscribed by the State governments. However, some States are averse to this. “Lenders have become more selective in financing power projects due to issues related to coal availability, environmental clearances, health of the state utilities, among others and that is reflected in the lower pace of commitments for the sector,” said Mr A. K. Singhal, Director (Finance) of NTPC.

But the country’s largest power producer NTPC has not scaled down capacity expansion plans. NTPC has awarded BTG (boiler turbine generator) contracts for projects of 6,860 MW and tenders have been invited for others projects totalling 13,000 MW, said Mr Singhal.

Not all power producers are strong as NTPC. “Power sector is a capital intensive industry and the banks that had earlier been aggressively funding these projects have hit their internal exposure limits for the sector and hence have slowed fresh sanctions,” said an official of Lanco Group.

Private power producer Lanco expects that once the the liquidity position of State electricity distribution companies improves, they will start paying their receivables to power producers on time as also clear past dues, improving the liquidity position of various developers. “This would enable developers approach banks again for funding further development of projects,” he added.

Financing also depends on the business model of the project. For instance, merchant power projects are less likely to find favour with the lenders due to a fall in the merchant power prices and greater offtake risks.

Recently, several changes were made to the regulations to improve availability of overseas debt to the power sector. However, Mr Singhal said, “given the high volatility and risk aversion in the global capital markets, we are not sure if domestic debt is getting replaced by foreign debt.”

(inputs from Shishir Sinha)

siddhartha.s@thehindu.co.in

(This article was published on July 28, 2012)
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