Chinese banks have offered yuan loans to finance more than $50 billion of power equipment for Indian firms at lower interest rates, giving a shot in the arm to credit-starved power companies but posing a serious threat to Indian suppliers such as BHEL and L&T.
Chinese lenders have approached the government for accepting renminbi as a currency for external commercial borrowing by Indian power firms. Private power firms said direct overseas borrowings are restricted to a few currencies such as the US and Australian dollars, yen and euro.
Indian power firms are strongly backing the Chinese move as they are struggling to finance projects after local interest rates rose to 13% from 9% in the past two years. Loans from Beijing would be available at least 200-300 basis points lower than rupee debt, making a substantial difference for projects as costs run into thousands of crores of rupees.
Local suppliers are feeling threatened by rising imports of Chinese equipment. Orders for 80,000 mw of equipment have been placed with Chinese companies. Cheap Chinese loans will fatten the order books of companies like Shanghai Electric Corp, SEPCO Electric Power, Dong Fang and Harbin, which have large capacities to meet the demand in China that generates 800,000 mw and is adding 100,000 mw of new capacity every year. India has a capacity of 170,000 mw.
The economies of scale combined with cheap credit is a threat for Indian gear makers. "Any loan with soft rates is welcome. But in the process, the country should not kill the domestic industry and source substandard goods," BHEL CMD BP Rao said. Analysts said though the Chinese equipment is cheaper, local equipment is often more efficient.
"Power companies need Chinese loans because Indian banks are reluctant to lend money to power developers as they are rapidly approaching their exposure limit of 15-20% of their net worth that they can lend to infrastructure projects," said a power company executive, who did not want to be identified.
Further, there are growing fears of defaults on such loans as there is a severe shortage of coal and natural gas to fire new plants, while state utilities, the main buyers of electricity, are in a financial mess and unable to settle dues in time.
Domestic equipment suppliers said Chinese banks were seizing the opportunity to lure Indian power companies. Local suppliers are already lobbying for import duty on Chinese equipment and fear easy credit would squeeze them further.
A senior power ministry official said the sector needs about Rs 11 lakh crore over the next five years. Half of this would be for power generation, and the rest for transmission and distribution. Going by a standard debt-equity ratio of 70:30, Rs 7.50 lakh crore would be financed with debt, and Rs 3.5 lakh crore from equity.
Orders for new equipment worth $50 billion have been placed with Chinese companies. Reliance Power had last year placed orders for 30,000 mw of equipment valued at around $10 billion with Chinese companies.
Commercial banks, export credit agencies and financial institutions in China would finance the projects. The company has signed $12 billion of financing agreement with leading Chinese banks such as Bank of China, China Development Bank, Industrial and Commercial Bank of China and The Export-Import Bank of China (C-EXIM) to finance Chinese exports.
The Association of Power Producers, a group of 12 companies, has asked the finance ministry and department of economic affairs to declare renminbi as an acceptable currency for corporates to avail term loan facilities from Chinese banks.
"Many power producers have tied up the supply of equipment for plants ... from Chinese original equipment manufacturers. This is largely because Chinese have the scale and manufacturing facilities to deliver requisite equipment to match the quick implementation schedule of the developers.
The Chinese banks are also keen to finance and support exports from the country, subject to a portion of the loans being availed in their currency," association director general Ashok Khurana said.
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