Not so fast

IFR India Special Report 2011
7 min read

Mega power projects are the mainstay of India’s domestic credit markets, but lenders are showing a new reluctance to book deals in light of mounting concentration risks.

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India’s power sector is beginning to feel the heat, or maybe the lack of it, as lending has slowed of late. The sector has always been the biggest component of loan portfolios.

This has been evident over the years, especially in the last three to four, when it has grown exponentially higher with state-owned utilities and private sector developers rushing to build power plants to meet increased demand due to rapid economic growth.

In 2010, the power sector registered loans of US$25.4bn, up from US$15.05bn in 2009 and US$8.9bn in 2008, according to Thomson Reuters data.

“Given the regulatory ceilings on individual/group lending laid down by the Reserve Bank of India, and the prudential sector exposure norms, the amount of additional debt banks can supply to new power projects may be limited. Nearly 40% of a sample of 30 banks have infrastructure exposures as a proportion to total exposures in excess of 15%; more than 40% of the banks have a power sector exposure that is greater than their consolidated equity,” said a recent Fitch Ratings report.

Indeed, Indian banks consistently top PFI’s league tables, largely because of loans to the power sector. For one, the government has a programme, comprising nine ultra mega power plants (UMPP), each with about 4,000MW of capacity and costing more than US$4bn. Already four have been awarded.

Bidding for the fifth UMPP – the Bedabahal UMPP in Orissa state – was delayed, but it is back on track with about 20 companies indicating interest. However, the government may need to revise the rules governing the bidding process, especially with regards to coal supply.

The availability of coal is a major issue. Several of the UMPPs and other proposed power plants have been designed to use imported coal, an indication that domestic coal supply will not be sufficient. There are already issues on the distribution of coal blocks: Tata Power is legally challenging the use of excess coal from the captive plant allotted to Reliance Power’s Sasan UMPP.

One official involved in the UMPP awarding process was reported as saying: “Whenever coal reserves are worked out, they are estimated quantities. To assume that there will be a matching quantity is wrong. If it is more, then what is to be done with the coal? It can be used for other projects that have been awarded through the competitive bidding route.”

Quest to secure coal supplies

At the same time, several developers of power plants, such as Tata Power, Reliance Power and Adani Power, have gone overseas and taken equity stakes in coal companies in a quest to secure coal supplies.

The first stop has been Indonesia, the region’s largest coal supplier. However, the government there has changed the coalmining law, effective September 23, and now prohibits exporters from selling coal at prices below notified rates. Indian power developers are now seeking government intervention, as the new law will make the coal more expensive and threaten the viability of some power plants.

Australia is another coal producer and, similarly, Indian developers have been forming partnerships there. It recently issued a draft mining law that will impose a levy on coal and iron-ore projects from next year. Again, this will make imported coal more expensive.

Train carriages stand at a railway station in Bangalore.

Source: Reuters/Jagadeesh N.V

Train carriages stand at a railway station in Bangalore.

The Indian Association of Power Producers, a group of 13 private companies, is understood to have asked the power ministry to set up an expert committee to tackle the rise in import rates. The association is also seeking permission to pass on higher fuel costs to consumers through higher tariffs. The current PPA framework does not protect the power companies from changes in coal prices stemming from amendments to laws in exporting countries.

Land acquisition is another obstacle to building power plants. Power developers and different government departments, such as the Ministry of Power, the Ministry of Coal and the Ministry of Environment and Forests, often disagree over what is possible and what should be done. Any delay in acquiring land, delays the building of projects, adding to developers’ costs.

Ample liquidity

On the financing side, domestic banks say there is enough liquidity to support the projects. However, the market is aware that sector limits are about to be breached if no new sources of funds are found. So, there is the challenge of raising external commercial borrowings from foreign banks, which are still yet to get fully comfortable with Indian market risks, especially in the power sector.

Rising inflation and interest rates are aggravating the issue. Project developers have relied solely on domestic lenders and may now have to pay more for the loans. Two years ago, the average interest rate was 9%–10%, but rates are now 12.5%-13.5%.

The RBI announced in late July a 50bp rate rise, more than the expected 25bp, further increasing project funding costs. The rise was in response to a 9.44% June inflation rate. That was the RBI’s 11th rate rise since March last year.

Another factor causing power-sector lending to slow is the fall in merchant tariff rates from about Rs5–Rs7 to around Rs2.5 per kWh. The lower prices may be seasonal, due to the monsoon, but they do affect the demand.

The credit quality of power distributors and the state electricity boards is again coming into the picture. Again, because it was the state electricity board that triggered the payment default related to the former Dabhol Power (the current Ratnagiri Power) saga of the 1990s and, from then until the recent Jhajjar power plant refinancing, there was hardly any foreign commercial bank participation in the Indian power sector. It now seems there is a question on the financial health of some of the distributors, which buy the power from producers to sell to retailers.

Nonetheless, lenders say there will always be funds available for bankable projects.

By Minerva Lau, AsiaPacific Editor, Project Finance International

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