In the last two quarters, there have been concerns raised by policymakers, financiers and developers on emerging difficulties in financing projects in the power sector. Several global and domestic macroeconomic and sector-specific factors have combined to pose a grim picture for financing in general and analysts have begun to conclude that the power sector, too, is experiencing a significant credit squeeze.
Global economic conditions continue to remain grim, with the recovery showing signs of stalling. The US debt situation has prevented fiscal consolidation, sovereign debt concerns have spread in the euro zone, and these, combined with the Japanese natural disasters and Middle East strife, have resulted in commodity prices remaining at high levels. Amid high unemployment rates and rising inflation, combined with high debt and fiscal burdens, global recovery remains vulnerable to macroeconomic shocks.
Fault lines: The combined annual financial loss of distribution utilities is in excess of Rs 70,000 crore.Photo Pradeep Gaur/Mint
Inflation in India remains high, and monetary and liquidity conditions have remained tight over the past few quarters, reflecting in higher borrowing rates for corporates. This is not good news for the power sector, which is now feeling the double whammy of rising commodity prices and higher cost of borrowings.
Amid all this, the focus has also intensified on the bottlenecks in domestic coal availability and production, with environmental concerns and delay in evolving a robust policy framework for linkages/allocation of coal.
Added to all this is the bugbear of the Indian power sector —distribution inefficiencies, which are beginning to assume unsustainable proportions with combined annual financial loss of distribution utilities in excess of Rs 70,000 crore. Average aggregate technical and commercial losses reported at around 30% are still extremely high. The weak finances of distribution utilities have resulted in their inability to procure short-term power despite rising energy deficits and this has moderated prices in the power exchanges over the past year or so.
All the above factors have combined to enhance the risk perception of the sector among investors and financiers alike over the past two quarters with the result that fewer transactions/financial closures of power projects have happened than reported over the first half of FY11. It is easy to conclude in this environment that there are issues with regard to availability of finance for the power sector.
Given the proposed capacity addition target of 100 gigawatts (GW) for the 12th Plan, on average, 20GW of capacity should achieve financial closure annually on a rolling basis from now on. That is a financing requirement of over $20 billion (Rs 90,400 crore) per year for generation alone. There have been reports recently of some banks reaching their sector exposure limits for power and being unable to lend further. This has also reportedly prompted the power ministry to request the finance ministry and the Reserve Bank of India (RBI) to examine relaxing the individual and group exposure limits of banking institutions.
Let us examine the above proposition in greater detail. RBI’s Financial Stability Report provides interesting insights to this issue. The share of infrastructure lending by scheduled commercial banks (SCBs) at the end of March stood at 12.9% of all advances, up from 11% the year before. Nearly 85% of the total banking sector’s exposure to infrastructure is limited to public sector banks (PSBs). Power accounted for 42% of aggregate infrastructure credit and has shown an average annual growth of 50% over the last four-five years. Since average credit growth of PSBs has been of the order of 22% for the year ended March, it can be concluded that infrastructure, power in particular, has been assuming a steadily higher share of the credit portfolio of PSBs. It is not surprising to find a few of the PSBs reaching their sector caps and a few reaching company or group-specific exposure limits defined by RBI. Overall, however, the proportion of credit to the power sector by all SCBs does not appear to be very high and there appears to be sufficient room for additional credit to the sector, even among PSBs.
The RBI report does, however, warn against the consequences of increased exposure to infrastructure among SCBs with regard to the asset-liability management issues associated with SCBs. This underlines the importance of infrastructure finance companies (IFCs) and specialized financial institutions that have access to long-term sources of funds and can refinance debt. While SCBs play an excellent role in being the primary assessors and financiers to the sector, the breadth of the market can be increased only if IFCs with access to long-term sources of funds can give out loans to SCBs periodically.
With an increasing number of projects getting commissioned on time, the need for such funding interventions is increasing, as indicated by the success of India Infrastructure Finance Co. Ltd.
Tweaking the prudential norms of banks and non-banking financial companies (NBFCs) will only temporarily benefit certain firms or groups that have large portfolios of projects. In the long run, the sector’s unprecedented financing requirements will require the availability of long-term sources of funding and the government will do well on structural interventions to enable this.
Good quality projects in the power sector have not been held up yet due to want of financing, although the cost of borrowing has definitely gone up over just the last two quarters. Besides SCBs, the sector has specialized sector-focused NBFCs such as Power Finance Corp. Ltd and Rural Electrification Corp. Ltd. Several projects importing equipment have also had access to export financing. With a surging rupee and tighter monetary situation in India compared with some overseas markets, external commercial borrowings have also been accessed by several corporate houses.
The availability of finance for the power sector is not, therefore, a matter of concern in the short term, although the cost of financing is comparatively higher. However, in times such as these, there is bound to be more caution exercised by financiers. This is not a barrier and, in fact, helps bring the focus back to improving the preparedness of projects for financing as well as addressing fundamental underlying factors impacting the sector’s sustainability. In the medium term, concerted action from the government towards deepening the availability of long-term finance for the sector is crucial to realize India’s dream of achieving 100GW capacity addition over the 12th Plan.
Shubhranshu Patnaik is senior director, consulting—energy and resources, Deloitte Touche Tohmatsu India Pvt. Ltd.
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