SBI plans policy to lend to coal miners ahead of landmark auctions

State Bank of India is creating a policy to lend to coal miners before landmark auctions that would end decades of state monopoly on the fuel, according to a person with knowledge of the matter.

Long-term offtake contracts assuring demand will be central to any lending decision, the person said, asking not to be identified before terms are finalised. The nation’s biggest bank would prefer a loan tenor closer to five years, the person added.

The planned policy suggests SBI is open to providing some of the financing required to put 41 coal mines with a combined annual production capacity of 225 million tons into private hands. The giant bank has flagged concerns about the sector, and Indian banks are reining in loans to corporate borrowers as the coronavirus pandemic pressures asset quality.

Lenders are also wary about sustained demand for coal, which is seen globally as a dirty fuel but is still the biggest source for electricity generation in India. In Japan and Europe, several banks have announced plans to cut down lending to coal projects.

India’s coal-fired power plants, the biggest users of the fuel, operated at an average 46.2 per cent of their capacity during the three months ended June, compared with 63.2 per cent a year earlier.

State-run MSTC Ltd. will hold the final online auctions from October 19 to November 9, allowing private companies to mine and sell coal for the first time in nearly five decades.

A representative for SBI didn’t immediately reply to an email seeking comment.

The price at which the coal will be sold to potential buyers will also be important to appraise the viability of the loans, the person said, adding that SBI will determine a cap on how much exposure it will have to the sector.