Despite the wide gap between demand for and supply of power, pace of funding for power projects is likely to remain slow. Besides, client exposure limits and heightened risk awareness about environmental impact may also affect financing, according to global ratings agency Fitch.
Along with environmental issues, land acquisition problems have also had a bearing on the funding decisions in the recent times.
Lending constraints, like limit on individual and group lending prescribed by the Reserve Bank of India (RBI) and the prudential sector exposure norms had bearing on capability to finance projects. Given these constraints, the amount of additional debt banks could supply to new power projects might be limited, Fitch said in its sector report.
According to RBI data commercial banks lent about Rs 81,355 crore to power projects in 2010-11. The outstanding loans to the power sector by the end of March stood at Rs 2,69,196 crore.
Power sector loans account for more than half the commercial banks’ loans to infrastructure. Their infrastructure loan portfolio in March had stood at Rs 5,26,612 crore.
Commercial banks and certain specialised financial institutions have traditionally been the main source of funding for power projects.
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Fitch said the deteriorating credit quality of state electricity boards, falling merchant power prices and fuel supply constraints were also contributing to the slower pace of funding to power projects.
An IDBI Bank executive said a large number projects had come up for funding in the last three-four years. Now, many of those were under implementation. There was perception that some of those, including ultra mega power projects (UMPPs) might face roadblocks due factors like shortages of raw material, especially coal and revenue realisation estimates.”
These sector-specific risks, combined with a rising interest rate regime and the slowing down of equity funding, would further hit the availability of funds to the power sector in the short to medium term.
The agency also expects these issues to increase the lead times needed to achieve financial closure on power projects.