Mumbai: An ambitious project to convert thousands of tonnes of agricultural waste in the farmlands of northern India into biofuel and thereby lessen Delhi annual affair with toxic air pollution, a serious health hazard, has run into delays.

Several oil marketing companies such Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), which had between 2016 and 2017 decided to set up 2G ethanol or bio-refineries, have failed to attain financial closure for the projects, with several lenders citing a recent Reserve Bank of India (RBI) directive that caps single borrower exposure limits by commercial banks.

Over the past few days, Delhi has witnessed a severe deterioration in its air quality, with burning of crop stubble by farmers in neighbouring states emerging as one of the key causes of air pollution. On Monday afternoon, Delhi's air quality index was at 438.

Proposed 2G ethanol plants were to offer a solution to this problem. 2G ethanol is produced using non-edible agricultural waste left over after harvesting. This can include corn cobs, rice straw, and wheat straw, among others, which is converted to cellulose which can later be fermented to form ethanol, which is turn can be blended with conventional fuel.

While IOCL was to set up one bio-refinery each in Haryana and Gujarat, HPCL had decided to set up one in Bathinda and BPCL in Odisha's Bargarh district. "The plan to build these bio-refineries is on but the progress has slowed as despite guarantees from the OMCs for a 100% offtake for 10 years, today the bankers are not releasing the debt funding. For most plants, the permissions are in place but due to paucity of funds, the progress has slowed," said a senior official from one of the companies spoken above.

Emails sent to the OMCs did not elicit any response. Email sent to the ministry of petroleum and natural gas also went unanswered.

These plants were to come up at locations close to farmlands, in order to reduce the costs of transportation of the raw material to the refineries. OMCs planned to set up a blending refinery or depot close to the farmlands. "Our plans to set up these bio-refineries are still in place. It's just that a high capex for us is a constraint in the sense that we would prioritize other projects which need high capex and attention at the moment. Each bio-refinery would need Rs1000 crore while capex for other projects is far higher," said another senior official from an oil marketing company.

Banks, on the other hand, say that while they are not opposed to lending to the oil marketing companies (OMCs), they are bound by a recent RBI directive which caps exposure to single borrower. The RBI’s large exposure framework restricts our exposure to a single borrower to 20% of our capital base," said a senior banker with a large public sector bank.

The RBI regulations, which came into effect on 1 April, also mandate that banks limit their exposure to 25% of their capital for connected parties.

According to the banker quoted above, most large banks, primary lenders to OMCs are close to this ceiling and therefore do not have much headroom. He added that the merger of Oil and Natural Gas Corporation (ONGC) and HPCL last year has resulted in exposures in two separate entities being clubbed as one and therefore shrunk the space for additional lending.

in 2016, the large exposure framework seeks to reduce concentration risk in the banking industry, already saddled with bad loans. It aims to align with the standards on a supervisory framework for measuring and controlling large exposures issued by the Basel Committee on Banking Supervision (BCBS).

government with an aim to reduce crude oil import and contain the oil import bill has been promoting ethanol production for India’s energy security. The new Biofuel Policy 2018 allows the use of other than molasses as feedstock to manufacture ethanol in the country. This includes sugarcane juice, agricultural waste, corn, surplus food grains, among others. The policy has fixed a target of achieving 20% ethanol blending with petrol by 2030. Internally, the government aims to achieve the first milestone of 10% ethanol blending with petrol by 2022.