Banks are shy of taking large and long-term exposures to ultra-mega power projects the government is proposing to set up. | |
| The government-constituted inter-institutional group (IIG) on ultra mega projects is now considering the option of roping in foreign debt for the projects. |
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| According to banking sources, the amount involved in these projects is huge and funding from domestic banks and institutions may not be possible. |
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| Considering even the four projects of 4,000 mw each that have been lined up for clearance this fiscal, the total amount required will be around Rs 72,000-75,000 crore, the sources pointed out. |
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| In this backdrop, the group is also proposing to bring down the equity component required for the projects to 20 per cent of the total project cost from the normal 30 per cent. The usual debt-equity ratio for a power project is 70:30. |
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| This assumes significance as the government has called for pre-qualification bids for projects in Sasan (Madhya Pradesh) and Mundra (Gujarat) by November 22. The option of foreign debt is a twist in the existing proposal as the government was not willing to consider foreign debt for these projects in view of the the Enron fiasco. |
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| However, even as the Indian lenders "" ICICI Bank, State Bank of India , Life Insurance Corporation, IDBI, IDFC and Power finance Corporation "" are considering the option of inviting foreign debt through external commercial borrowings , they have asked for appropriate payments security mechanisms. These banks and financial institutions constitute the IIG. |
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| The banks have been particularly reluctant to invest in these projects as most of them have brought down the duration of their exposures to 4-5 years. Duration is the average maturity of the entire asset portfolio of the banks. |
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| These banks would prefer government guarantee for their exposures to these ultra-mega projects. This is because, in a rising interest rate scenario, banks are unwilling to expose themselves to being required to make provisionings for longer term maturity (10-15 years). |
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| Even if the banks invest in these projects in the initial period of 4-5 years, Life Insurance Corporation (LIC) may be the only interested party for taking over the liability for rest of the maturity, thus saving the banks from having to take long-term exposures. |
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| This arrangement is called takeout financing in banking parlance. However, with the change in mix of products of the insurance companies, specifically unit-linked products, insurance sector is not in position to take over the entire liability for longer term. |
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