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Business News/ Industry / Energy/  Govt looks to extend 5:25 scheme to older power projects
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Govt looks to extend 5:25 scheme to older power projects

The move will ease project and financing bottlenecks for power companies and help generate more electricity to cater to needs of the recovering economy

The so-called 5:25 scheme was announced by finance minister Arun Jaitley in his budget speech on 10 July. Photo: Pradeep Gaur/MintPremium
The so-called 5:25 scheme was announced by finance minister Arun Jaitley in his budget speech on 10 July. Photo: Pradeep Gaur/Mint

New Delhi/Mumbai: The finance ministry wants to extend a scheme that makes it possible for new infrastructure projects to receive bank funding to older power projects that are in a precarious position, largely owing to financial woes arising from delays, which are, in turn, caused by issues related to land acquisition or availability of fuel.

The move, if it happens, will ease project and financing bottlenecks for power companies and help generate more electricity to cater to the needs of an economy that, after two years in the doldrums, looks set for modest growth in the medium term.

It will also address the issue of bad loans (and loans threatening to turn bad) on the books of banks.

“The extended repayment schedule of the bank loans under the proposed scheme will be a huge respite to the already strained cash flows of the projects and enable higher free cash flows to accrue to the equity investors, possibly resulting in better return on equity in most cases," said Sandeep Upadhyay, senior vice-president, infrastructure solutions group, Centrum Capital Ltd.

Given that, he added, it doesn’t make sense to not make it available to existing projects.

“In an otherwise constrained infrastructure financing market in India, where most of the funding agencies and banks are grappling with asset-liability mismatch, the suggested scheme comes with genuine advantages and the same should be passed on to fresh as well the existing borrowers."

The so-called 5:25 scheme was announced by finance minister Arun Jaitley in his budget speech on 10 July. Subsequently, Reserve Bank of India (RBI) notified the rules, but allowed it only for new projects.

Infrastructure companies and analysts said this would not help them push delayed projects. Nor would it, they pointed out, help address the stress on the books of banks.

In 2013-14, projects with investments of more than 6 trillion were shelved, abandoned or stalled, according to data with Centre for Monitoring Indian Economy.

Around 100,000 megawatts of power-generating capacity is stuck for one reason or another, according to government estimates.

Meanwhile, gross NPAs (non performing assets or bad loans) in the banking system rose to 3.9% of gross advances in the year ended March, as against 3.3% in 2012-13. A 6 October report by rating agency Crisil estimated gross NPAs in the banking system at 4% at the end of this fiscal.

Robin Roy, associate director, financial services, PricewaterhouseCoopers, said the government and other stakeholders realize that infrastructure projects need to start generating cash flows to ensure that asset quality of banks does not deteriorate further.

“A lot of the restructured assets have come back to haunt banks. From 1 April, banks will have to make more provisions for such assets, impacting their profitability. It is only fair to the capital providers that such assets again start generating cash flows," he said.

Power companies are outliers when it comes to loans. According to RBI data, bank loans to power companies stood at 5.23 trillion as of 22 August 2014 .

The demand that the scheme be extended to existing projects was made by representatives of power companies in a meeting with officials of the finance ministry and power ministries on 17 October.

“Existing projects need to be financed. The power sector has asked that the 5:25 scheme to be extended to existing projects as well", said a senior finance ministry official, who did not wish to be identified. “We are considering this demand. We will go to the RBI for this," the official said.

Madhu Terdal, group chief financial officer at Bangalore-based infrastructure conglomerate GMR Group, said it is critical to extend the 5:25 scheme to existing power projects as many companies are in severe distress.

GMR Infrastructure Ltd, the flagship company of GMR Group, has 15 power generation assets of which eight are operational and seven are in various stages of development.

The 5:25 scheme is aimed to address the challenge banks face when lending to infrastructure projects—a mismatch in time horizons. Banks rarely lend beyond five or seven years. Infrastructure projects may take 25 years to be viable (and banks can’t raise money for that long a period to fund their requirements).

The 5:25 scheme allows banks to think of the project in five-year windows. After that period, the borrower will pay back the loan through takeout financing provided by other banks.

Even this could do with some improvement, said Terdal. “It will be cumbersome to find a new set of lenders to refinance the existing loans every five years under long term loan agreements. Ideally, 5:25 scheme should enable companies to refinance the loans within the existing banking consortium."

Bankers admit that it makes sense to extend the scheme to existing power projects but fear they will not be able to find new banks to take over the loans.

“There is a need for extending the scheme to existing projects as well since the power sector is facing problems due to coal supply. But what will be key is that there should be new investors who are interested to invest in such stressed projects," said M. Narendra, former chairman and managing director of Indian Overseas Bank.

On Monday, the government sought to address the issue of fuel availability by announcing online auctions of coal blocks to companies in the power, cement, and iron and steel businesses.

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Published: 22 Oct 2014, 12:42 AM IST
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