Lending norms may be eased for UMPPs

With no sign of the global liquidity crunch abating, the government is planning to ease the lending norms for banks and financial institutions so that they can provide funds for the ambitious ultra mega power projects (UMPPs).

Under the existing norms, a bank is not allowed to take an exposure beyond 20 per cent of its net owned funds in an individual company and not more than 50 per cent of its net owned funds in a particular group.

Government sources said the proposed move is aimed at relaxing these norms so that banks can take bigger exposures in projects that entail large capital expenditure. “In the current environment, when the global markets are not conducive for raising resources, these restrictions have created additional hurdles for many projects in achieving financial closure,” the sources said.

The Manmohan Singh government wants to hand out four UMPPs before its term ends in mid-2009. While three have already been awarded (Sasan in Madhya Pradesh and Krishnapatnam in Andhra Pradesh to Reliance Power and Mundra in Gujarat to Tata Power), the fourth (Tilaiya in Jharkhand) will come up for bidding on December 29.

Each UMPP is of 4,000 Mw and the total investment in the four projects is estimated at Rs 80,000 crore. Of the three projects that have been awarded, only one, Mundra, has achieved financial closure. The other two are learnt to be close to financial closure.

What makes matters worse for large projects apart from the current lending norms is the low net worth of Indian banks. “Lending to UMPPs has become difficult, given the current net worth of these banks,” said a banker (See table). Because of this, even bank consortiums are finding it difficult to fund UMPPs.

Besides the State Bank of India and ICICI Bank, there are only four banks, all in the public sector, which have a net worth of over Rs 10,000 crore, government sources said. Most Indian banks have a net worth of around Rs 5,000 crore. This means that these banks cannot lend more than Rs 1,250 crore to a company and Rs 2,500 crore to a group.