Banks press pause button on power loans

Source : Business line :Priya Nair:Mumbai, Sept. 19.2010

The power sector could run into a funding crunch as banks are going slow on lending.

Many lenders have hit the sectoral credit exposure limit and concerns have emerged over environmental and coal mining clearances.

As a precautionary measure, banks are laying down conditions such as tying up coal linkages. Some are even insisting that the coal supply should be only from within India and not from countries such as Indonesia and Australia, from where a lot of companies are now trying to source coal.

Problems

But, domestic coal production is beset with its own set of problems like obtaining clearances from the Ministry of Environment, which can take ages or may not come at all.

A senior official from a public sector bank said that currently, disbursements are only for power distribution and transmission projects.

Agreeing that disbursements are not happening, even though sanctions are in place, Mr M.D. Mallya, Chairman and Managing Director of Bank of Baroda, said the bank looks into factors such as the capability of the promoter to ensure supply of coal and back-up plans in case supply gets affected.

“Coal linkage is the most important factor for a power company to succeed. After all, coal is the raw material,” he said.

BoB's exposure to the power sector would be around 7-8 per cent of it total loan book, which still leaves it with some room to lend, Mr Mallya added.

Power and roads account for a major part of the total infrastructure lending for most banks.

Additional plants

According to a report by India Infoline, as of July, India had 87 gigawatt of coal-based power generation capacity and work on an additional 90 GW of plants is under way. 

However, a senior bank official said that about 50,000 MW of power projects could be left in limbo, following the Ministry of Environment and Forests' recent classification of certain coal blocks as ‘no-go' areas or areas where there is a dense cover of forests and mining cannot be done.

An official from Union Bank of India also said the bank is restricting loans to the power sector and insisting that coal linkages, power purchase guarantees and security coverage need to be in place before sanctioning the loan.

“There is demand for funds and projects are coming up, but power companies are facing uncertainties with regard to clearances due to the Environment Ministry's rules.

 So, financial closures of these projects are not happening and sanctions are not getting converted into disbursements,'' he said.

The power segment comprises over 20 per cent of Union Bank's total advances. If the sanctions get converted, the bank will exceed its limits, he added.