India plans Rs50,000 cr power sector debt fund

In an attempt to bridge a funding shortfall and help banks avoid asset-liability mismatches, the government plans to create a Rs50,000 crore debt fund that will raise low-cost and long-term resources for re-financing power projects.

“The fund is in the process of being formulated. Takeout financing is what we are looking at,” said Union power secretary P. Umashankar.Takeout financing is a system designed to help banks lend to long-duration projects. In takeout financing, a long-term financing institution such as India Infrastructure Finance Co. Ltd (IIFCL) agrees to take an existing loan off the books of a bank for a price. This would help banks in asset-liability management in financing long-term projects when their resources are short- or medium-term in nature.

“Any power sector project that has crossed the stage of uncertainty such as construction will benefit from this. The fund will also create room for the banks to lend,” said Umashankar.

The funding ability of Indian institutions is restricted by central bank limits on how much they can lend to each sector or business group. As a result, the country’s target of adding 160,000MW of capacity in the 11th Plan (2007-12) and 12th Plan (2012-17), requiring a total investment of Rs18 trillion, hinges on the ability to mobilize debt. According to a concept paper for the fund reviewed by Mint, it will be set up by one or more sponsors acting as general partners. It will be managed by an asset management company, and may refinance up to 90% of outstanding project debt and will earn around 100 basis points over what it pays to investors. One basis point is one-hundredth of a percentage point.“The plans for the funds are in the preparatory stages,” confirmed a senior government official aware of the development, who did not want to be identified.

The preparatory meetings for the fund will be held under the chairmanship of Deepak Parekh, chairman of Housing Development Finance Corp. Ltd. Officials of the Planning Commission, the Union power ministry, state-owned power sector lending institutions such as Power Finance Corp. Ltd (PFC), Rural Electrification Corp. Ltd (REC), and the Central Electricity Authority, India’s apex power sector planning body, will participate in the meetings.

 India has been for long contemplating setting up such infrastructure funds. Bloomberg had reported on 14 May about plans for an $11 billion (Rs51,590 crore today) debt fund to build ports, roads and bridges, citing Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

The paper says the sponsors of the power sector fund may be a combination of organizations such as PFC, REC, Life Insurance Corp. of India, State Bank of India, Infrastructure Development Finance Co. Ltd and IIFCL, among others.It may also include investment banks and non-banking financial companies along with multilateral funding agencies such as the International Finance.