External risks soften lenders' interest in renewable energy projects

Renewable energy projects are on top of the agenda of financiers because they have predictable cash flows and are less volatile.

Yet lenders are wary of taking large exposures to the sector because of factors external to it. The pressure to re-negotiate contracts to reduce tariffs and the viability of power distribution companies are some of these.

The Reserve Bank of India in September 2020 revised priority sector lending (PSL) norms to push financing for small projects in the sector, but this has not increased the loans substantially. Loans to renewable energy under PSL rose by 66 per cent to Rs 1,144 crore in May 2021 from Rs 688 crore a year ago, but experts say this was largely because of a low base effect.

The regulator’s intent is good, but it is not going to make a difference, said Manish Chaurasia, MD, Tata Cleantech Capital. Funds will flow to projects once the policy on tariffs is stable, he said.

Typically, every quarter there is bidding for projects of around 5,000 Mw. But the awarding and consequent signing of power purchase agreements, which is crucial for lenders, are getting delayed, said executives at banks and finance companies.

In the past three years, funds worth Rs 1 trillion flowed into the sector. Of that loans and debt from the domestic market were about Rs 35,000 crore. Another Rs 40,000 crore came from green bonds and external commercial borrowing. The balance was equity and internal generation, according to the CRISIL data.

Samuel Joseph Jebaraj, deputy managing director, IDBI Bank, however, said the sector was mature and renewable energy projects had become efficient, and achieved grid parity on commercial terms unlike a few years ago. Besides, as Manish Gupta, senior director, CRISIL, put it, renewable energy is less risky than thermal power because the latter is more capital-intensive. The prices of inputs have also come down. This could help in committing more funds in the future.

The growing interest is reflected in foreign banks becoming ready to fund projects. DBS Bank India, for instance, has been active in both the solar and wind segments. It is in the process of financing a few renewable energy projects, said Surojit Shome, MD and CEO.

Beyond project profiles, another issue affecting flows is the condition of original equipment manufacturers in, say, wind energy. Inox and Suzlon are facing adverse times, including insolvency. This has led to a sub-optimal operation and maintenance of operating units because they put up projects and maintain them during the plant’s life and the tenure of the loan. This often causes lower revenue, affecting lenders, said the head of an infrastructure financing company.