The government wants the public sector banks (PSBs) to consider a separate exposure limit for credit to renewable energy projects to improve fund flow into this capital-intensive industry.
The finance ministry took this issue up with the chiefs of state-run lenders in a meeting held in Delhi on March 18, said a top PSB executive, requesting anonymity.
Loans to the power sector have seen consistent growth, but banks traditionally give preference to conventional power projects rather than renewable energy units. Banks' exposure to the power sector rose to Rs 4.07 lakh crore in January 2013 from Rs 3.28 lakh crore in March 2012, according to the Reserve Bank of India (RBI).
Considering the importance of promoting renewable energy sources, banks could consider carving out a separate sectoral exposure limit. This, according to the finance ministry, could be either through prescribing an independent exposure limit, or having a sub-limit within the exposure limit for the power sector.
Banks prefer financing conventional power projects due to their large size and financing requirements, but this has led to crowding out of finance for the renewable energy sector, feels the finance ministry.
The investment requirement for the renewable energy sector for the next five years has been projected at around Rs 3 lakh crore and over 90 per cent of it is expected to come from the private sector.
According to the finance ministry, renewable energy production is a capital-intensive business. The risks involved are high and the viability of the project is dependent upon factors such as regulatory support and technology trends. Banks charge higher interest rate for loans to the industry due to high perceived risks.
With the smaller project size, tapping overseas markets for funds is not an attractive option for renewable energy companies, according to another bank executive. Moreover, the financial distress faced by state power distribution companies (discoms) pose offtake risk (beyond the renewable purchase obligation) and repayment risk for such projects.
In recent times, bankability in the solar segment has emerged as a major issue mainly due to aggressive bidding for projects. This has raised concerns about the viability of such projects. Further, in many states, evacuation infrastructure for renewable energy projects is not available, the official added.