Shinde pitches in for power projects exposure limit hike

Written by Sanjay Jog | Mumbai | Updated: Jan 7 2009, 05:13am hrs
Power minister, Sushilkumar Shinde, has finally sought Prime Minister Manmohan Singhs intervention to help developers of power projects with a capacity of 1,10,000 mw. Shinde has pitched strongly for an increase in the exposure limit of capital funds of banks, from 20% to 50% for a single borrower, from 30% to 70% for group borrowers. He has also demanded that the industry exposure limit be hiked from 15% to 25% of total advances and that LIC's 10% exposure limit for a single investee company (including Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) be removed in case of the power sector. Shinde also demanded that the PFC and REC be allowed to raise Rs 10,000 crore through tax free bonds by March 31, while withholding tax, which increases the cost of borrowing by 2-3%, be exempted from ECB for the power sector.

The minister also urged that the RBI be asked to extend refinance facility to 50% of funds provided by PFC and REC for projects sanctioned over the next 18 months (Rs 50,000 crore can be provided by RBI). Furthermore, banks should be advised to lend PFC and REC at repo rate plus reasonable margins under the special finance facility provided by RBI to banks till June 20 for onlending to NBFCs, Shinde added. Shinde, in his recent communication to the PM, argued that the prudential norms prescribed by RBI restrict the availability of funds to a capital intensive sector like power and in order to ensure sufficient and timely flow of funds, the exposure limits of banks to power sector companies, including NBFCs like PFC and REC, may be enhanced to 30% for single borrower and 70% for group borrower of capital funds. Given the current state of the credit market, a special dispensation is necessary for the ultra mega power projects (UMPP)s. Financial closure is complete only of Mundra UMPP and that of Sasan is in progress.

At a normative cost of Rs 4.5 crore per mw, the project cost of a UMPP would be around Rs 18,000 crore, and with a debt equity ratio of 75:25, the debt requirement would be Rs 13,000 crore. Thus, the exposure limit of banks may be increased to 50% in case of a single borrower and 85% in case of group borrowers of capital funds, the minister said.

IRDAs guidelines restrict the LIC's ability to invest in infrastructure companies. Thus, the 10% limit should be removed to make adequate funds available to power projects. Similarly, the exposure of LIC to group borrowers also needs to be relaxed for the power sector.

Shinde also called for relaxation in ECB norms, since most of the power projects are floated under the SPV route and so, will not have the strength to raise funds from international markets. Banks and financial intermediaries like PFC, REC can raise foreign currency funds on their own and channalise these funds to the power sector. In order to expedite the drawal of ECBs without waiting for RBI's approval, it is requested that these financial institutions be brought under the aumatic route, the minister noted.