Green shoots: State-run banks, NBFCs tilt towards renewable energy projects

The second of a three-part series on credit pick-up looks at renewable energy sector, which is facing issues like cancellation of projects and grid curtailment

Banks have been wary of lending to the renewable energy sector, owing to the Rs 2 trillion worth of non-performing assets (NPAs) in the conventional power sector. But it seems the tide is turning.

Experts said factors such as one-time capital investment, steady returns and slowdown in the conventional energy space have made green energy a preferred choice for public sector banks (PSBs) and non-banking financial companies (NBFCs). The renewable energy sector needs close to $550 billion investment to meet India’s target of achieving 40 per cent of its energy requirement from clean energy sources by 2030. And financial institutions are now designing separate and unique products to attract large projects in the sector.

State Bank of India’s annual report for 2018-19 states that as on March 31, 2019, its sanctioned portfolio in renewable energy rose by 21.37 per cent from the previous reporting period. Its in-house renewable capex also increased by 28 per cent over the same period.

As of March 31, 2019, 656 renewable energy projects, totalling 12,334 MW, have been completed. SBI has sanctioned Rs 29,821 crore for these projects and the current outstanding loan is Rs 16,827 crore. It has also set up a Neev fund, which will focus on newer areas, including clean energy.

Among the private banks, YES Bank has sanctioned credit for renewable power projects with a total capacity of 2,705 MW. “The bank is an associate organisation that supports the International Solar Alliance (ISA). In FY 2017-18, the bank committed to mobilise $1 billion till 2023 and $5 billion till 2030 toward financing solar energy projects in India,” YES Bank said in its annual report.

However, most major banks continue to avoid renewable energy, say experts. “Most banks, including PSBs, are extremely cautious on the renewable energy sector. Other than government financial institutions such as PFC, REC and IREDA, there is a dearth of active lenders in the sector, leading to a scarcity of options for debt financing,” said Vinay Rustogi, managing director, Bridge To India, which works in the renewable energy sector. 

The ministry of new and renewable energy (MNRE) recently asked the finance ministry to come up with separate funding streams and financing regulations for the sector. MNRE has written to the Reserve Bank of India, asking for the removal of the cap of Rs 15 crore from the lending norms of the sector. The move is in line with the latest change in the bidding regime, under which large projects will be offered. 

In an industry-government dialogue held earlier this year, top executives in the sector had told the government that financing, shortage of investment capital and the risk of NPAs stand in the way of the growth of renewables in the country. Wind power, too, needs domestic financing as it faces regulatory challenges and, hence, has seen a drop in foreign investment. 

To address the challenge of accessing initial capital requirement, MNRE has urged leading financiers such as the Power Finance Corporation (PFC), Indian Renewable Development Agency (IREDA) and Rural Electrification Corporation (REC) to design specialised lending schemes for the renewable sector.

Currently, IREDA is the only dedicated financing body for renewable energy. However, in its Annual Report 2017-18, IREDA said it finds itself “constrained to fund capacities of 500 MW and above”.

PFC ventured into the renewable sector with separate lending schemes in 2017. The company reported a 260 per cent growth in loan disbursement to the sector during 2018-19. It also lowered its lending rates in the range of 9.5-11 per cent for renewable energy projects.

Even so, uncertainty over project awards and challenges such as the safeguard duty on imported solar equipment and cancellation of projects by states could keep investors at bay. 

In the past, the major investment in renewable energy projects has come from  private equity/venture capital funds, including such marquee names as Goldman Sachs, ADIA, CPPIB and so on. But this has slowed down now. In its latest report, Mercom Research said that during Q3 2019, investments in the Indian solar sector were 11 per cent lower compared to investments made in Q2 2019.

“The situation has got worse over the last year due to DISCOM payment delays, land and transmission constraints, PPA renegotiation, multiple instances of tender cancellation and under-subscription, grid curtailment etc.” said Rustogi.

Therefore, project developers are looking at other options such as green bonds and offshore debt from international banks and financial institutions “In the last six months, companies have raised about $2.5 billion through green bonds. But that option is restricted to a small number of the larger developers,” Rustogi said.

In Andhra Pradesh, close to Rs 25,000 crore of lenders’ exposure stands at risk because the state government has cancelled all previously allocated projects. “While the sector is emerging as a preferred investment, it still has a long way to go before it gains lenders’ confidence,” said a senior sector executive.