Fis Seek Higher Equity-Debt Ratio For Small Power Units

Financial institutions are seeking a higher equity-to-debt ratio from the promoters of small power projects ranging in size from 50 to 100 megawatts. The idea is to bring down the debt component and make financing of these projects easier.

The industry has been proceeding on the assumption that financial institutions will accept a 30:70 equity-debt ratio, the same as has been allowed for major private sector projects. The institutions are now seeking a 40:60 equity to debt ratio.

But companies which are already into power generation and those with very strong balance sheets may be allowed to limit their equity size to 30 per cent, sources said.

 

Sources at two financial institutions said they were generally looking for a higher portion of equity because a large number of companies wanting to set up low-capacity power units did not have the kind of high-quality balance sheets they were looking for.

The institutions have now decided that they are prepared to take exposure between 50 and 55 per cent of project cost through a combination of direct funding and guarantees. Ideally, the direct finance could be 35-40 per cent of the project cost and the remaining part will be covered through guarantees.

This decision leaves a fund gap of 15-20 per cent for a power project which is expected to raise loans up to 70 per cent of the project cost. The best source for meeting this gap is export credit agencies and other financiers like multilateral and bilateral institutions.

But these organisations usually insist on guarantees from reputed banks and financial institutions.

Project promoters are finding it difficult to obtain necessary guarantees for ECA financing as the Indian institutions have made it clear that direct funding and guarantees issued jointly by banks and financial institutions cannot exceed 55 per cent of project cost.

The only alternative for the promoters is to seek non-recourse funding from foreign sources which means the funding organisation will not insist on guarantees from Indian banks or financial institutions.