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Rediff News  All News  » Business » Now, a bankers' group headed by SBI

Now, a bankers' group headed by SBI

November 25, 2010 09:46 IST

The central government plans to set up a group of public sector banks headed by State Bank of India (SBI), which would brainstorm on ways to make low-cost funding available for power projects that are being set up under the National Solar Mission.

The group of banks will try and work out a financial instrument specifically designed for low-cost financing of solar power projects. These projects, to be set up at a cost of Rs 15 crore for every megawatt (Mw), are at least three times costlier to erect as compared to their conventional counterparts.

"We are making this group of banks headed by SBI which would sit and do brainstorming to see what are the steps required to make projects more viable by making lower cost of funds available for solar projects in the mission," Deepak Gupta, secretary in the Ministry of New and Renewable Energy (MNRE), said.

"I am writing to all the major public sector banks. The group will have its first meeting before December 15," he added.

High capital cost, average gestation periods, multi-year benefits and low maintenance cost are some of the characteristics of solar power projects which make these different from conventional power plants.

"We are asking the bankers to design a financial instrument specific for these needs. The bankers' group will work on the financing pattern for only solar projects. We have asked the banks to nominate their representatives," Gupta said.

One of the prime reasons why banks have been wary of lending for solar power projects is the ill financial health of distribution companies.

Under the solar mission, a developer has to sign a power purchase agreement (PPA) with NTPC Vidyut Vyapar Nigam Ltd (NNVN), the government's power trading arm, which would sell the high-cost solar power to distribution companies after bundling it with low-cost thermal power.

"The one question that the lenders are asking is that these PPAs should be assignable in the event of a payment default by the distribution company. The main concern for the banks is the payment link between the distribution company and NVVN," said James Abraham, chief executive officer of Sunborne Energy.

The company plans to invest over Rs 1,600 crore (Rs 16 billion) over the next four years in solar power projects in India. Assignable PPAs allow a lender to take over the project in case of a default.

Abraham, however, added that the PPAs for solar projects had been designed by the government in a manner that addressed this concern.

"The payment link which was of concern has been broken in the PPA. So that, even if discoms default, NVVN will still be able to pay to the developer due to the payment security mechanism linked to the budgetary support of the ministry," he said.

The proposal of using MNRE's budgetary support for covering payment risk to developers under the solar mission has been approved by the finance ministry. MNRE is currently in the process of seeking Cabinet approval for the proposal.

However, lending for solar projects still remains risky for bankers, as it is an entirely new area of funding in India. MNRE's move to set up a group of banks for seeking "innovative financing" for solar projects is a step in the right direction, according to the industry.

"Banks are still in a learning phase in solar area. Through this group the banks will be able to share their learning and share risks across multiple projects," Abraham said.

Industry experts have hailed the government's decision to set up the group. "There is currently enormous funding pressure on the banking system, as 70 per cent of the funding requirement for solar mission is to come as debt.

Also, huge dependence on regulatory subsidies and the risks of new technology selection will underline the economies of investment in the field. The group of banks would be a nice way to develop an understanding of these risks," said Gokul Chaudhri, partner, BMR Advisors.


Sudheer Pal Singh in New Delhi