Cash crunch forces power firms to tap foreign funds

A sharp rise in coal prices, delays in land acquisition and environmental clearance have led to delay in project implementation

Rising interest rates on rupee loans and banks’ reluctance to lend more money to the power sector as most have reached their sectoral exposure limits are forcing power firms to tap alternative funding sources such as the external commercial borrowing (ECB) route to fund projects.

While there are regulatory norms for banks’ exposure to individual firms and groups, industry exposures are decided by individual bank boards.

A sharp rise in coal prices, delays in land acquisition and environmental clearance have led to delay in project implementation. This has made banks reluctant to lend to these firms, senior bankers and industry experts said.

The Association of Power Producers (APP), the industry lobby of independent power producers such as Tata Power Co. Ltd, Reliance Power Ltd and Adani Power Ltd among others, has asked the government to relax rules to help power firms borrow more from the global market, said Ashok Kumar Khurana, director general of APP.

“We have approached the government to hike the ECB limit to the maximum possible level from $30 billion,” Khurana said.

The 12th Five-Year Plan beginning 1 April has projected a 100,000 MW capacity expansion. According to Central Electricity Authority estimates, the power sector will require financing of Rs13.9 trillion in the 12th Plan.

To meet a realistic target of capacity addition of 75,000MW in the 12th Plan, the country will need an investment of Rs9.73 trillion, including debt, APP said.

Prabal Banerjee, chief financial officer of Adani Power, said just raising ECB limit is unlikely to help; the government should also relax the cap on interest rate on such loans from 5% to 7%.

Foreign lenders are more comfortable lending to projects near completion. Refinancing rupee loans through ECB is restricted at 25% of total debt and this cap needs to be removed to let firms raise funds through ECB, Banerjee said.

“The larger concerns currently faced by the power sector are availability and pricing of fuel and financial health of state electricity boards, than funding issues,” said Vikram Limaye, executive director of the Infrastructure Development Finance Co. Ltd. “Unless these concerns get addressed, the sector is unlikely to see a free flow of credit.”

Most banks have touched their exposure limit to lend to infrastructure sector, making new disbursements difficult, said a Union Bank of India official, requesting anonymity.

Typically, banks lend to power firms at an interest rate of 12.5-13.5% and the maturity of these loans vary from 12 to 17 years, depending on the profile of the project. Most banks have nearly 60% of their total infrastructure loans to power firms.

Indian banks have lent Rs2.98 trillion to the sector as on 26 August. Sectoral loan growth rose 35.8% in 2010-11 from a year earlier, less than the 48.5% in the previous fiscal.

“Power firms will certainly benefit if they are able to borrow from international lenders as their overall cost is around 8-9% as against 13-14% domestically,” an IDBI Bank Ltd official said.