Time is Now for RBI to Categorize Renewables as a Separate Sector, Remove Lending Limits
RBI needs to decouple clean energy from polluting fossil fuels, ease liquidity crunch
The rapidly expanding renewable energy in India accounted for almost 36% of India’s total power capacity mix at the end of the calendar year (CY) 2019. The country’s total installed power capacity stood at about 371 GW as of December 31, 2019. Of this, renewables (including large hydro) accounted for about 133.2 GW. This growth signals that the sector needs to be given a distinct status decoupling it from the conventional power sector.
The lending to the sector also needs special focus, especially after the non-bank financial companies (NBFCs) crisis, brought lending to the sector to a screeching halt. Due to a growing number of NPAs, funds started drying up, making it tough for financial institutions to extend credit to sectors overall.
This crisis triggered the Reserve Bank of India (RBI) to begin Prompt Corrective Action (PCA) on most of the public sector banks, which stranded lending by these banks to any sector, including renewables.
PCA is a structure under which banks with weak financial indicators are kept under watch by the RBI. While under this radar, banks are mandated to cut lending to corporates and focus on reducing the concentration of loans to certain sectors. Under this framework, if NPAs are more than 12% of loans extended, they are considered high risk, and banks have to stop lending and start the recovery of funds. Since most bank activities are supported by deposits that need to be repaid, a bank must carry a sufficient amount of capital to continue its activities. So, only banks with better capital can have more lending ability.
Thermal projects are highly capital intensive and also the ones that have turned NPAs. Owing to this, lending to the power sector received a blow after the PCA kicked off post the NBFC crisis. Since renewable energy falls under the broader umbrella of the power sector, it suffered the same fate as other power projects.
“As the renewable energy industry tries to get back on its feet post coronavirus lockdown, the availability of financing is going to be a big challenge as banks will be wary of lending. It is time to unshackle the renewable sector from the larger fossil fuel sector so the industry can realize its full potential without the caps and limitations,” said Raj Prabhu, CEO of Mercom Capital Group.
Hope was that with the government’s support, the renewable energy sector would grow at a rapid pace, and the funding from the banks would increase. But this has not been the case, and the low lending levels over the past two years has dampened the spirit of stakeholders. For the renewable sector to grow and meet the 175 GW target for 2022, lending needs to become freely available, which will not happen without decoupling renewable energy from the conventional power sector.
Addressing the issue, Rajendra Kumar, Deputy General Manager at IREDA, commented, “The sector has matured, and the underlying strengths of the sector, such as transparent project allocation through competitive bidding route, absence of fuel risk, predictable cash flows, long-term power offtake agreements and government’s thrust for the sector are paving the way for a brighter future. It may not be correct to assume that lenders are not willing to lend to the renewable energy sector. The solar sector, among all the renewable energy sector, is one of the most promising sectors for lenders to enhance their loan book size. IREDA itself has sanctioned and disbursed its highest loan amount during the last financial year in the solar sector, and the results have been quite satisfactory.”
Among renewables, the solar sector has grown rapidly in the past ten years. By the end of 2019, the cumulative solar installations reached approximately 35.7 GW. Large-scale projects account for 31.3 GW, whereas rooftop solar installations have just about reached 4.4 GW. Large-scale solar pipeline stands at 23.7 GW, with 31.5 GW of tendered projects awaiting auctions.
This magnitude of installations calls for more banks to lend to the solar sector.
“There is no separate renewable energy sector line item prescribed by the RBI. Due to the stress in thermal power projects, the majority of the banks have NPA issues, and their sectoral limits are exhausted. The banks avoid giving long-term loans as required by the sector (average 20 years) due to asset-liability mismatch in their balance sheet. The public sector undertakings (PSUs) are rigid around capital structure and don’t agree on equity, and compulsory convertible debentures structure, forcing developers to bring in full, common equity. There is very little push from the government on the banks to provide separate renewable energy project approvals,” says Shyam Sharma, CFO, Amp Energy India.
“Further, there are a lot of unresolved NPA issues in the thermal power sector on account of cost overruns, coal mine cancellations, and price increase in imported coal. It’s high time that the Reserve Bank of India intervened to address project funding requirements for the renewable energy players. RBI has maintained a stance that they do not have any objection to banks categorizing power and renewable energy sectors separately for lending so that funds would flow more to Renewables,” added Sharma.
It’s time that the Reserve Bank of India (RBI) took stock of the situation and decoupled the lending to renewables from the power sector, and this may provide the much-needed boost to the renewable sector.
Highlighting the need for the RBI to intervene, added, “Although renewables are part of the power sector, a separate limit for renewables may unlock the exposure barriers for banks and may provide the much-needed push for the financing of green energy projects. Accordingly, RBI intervention in terms of segregation of renewables from the usual power sector projects will be a welcome move for the sector. It would complement the Ministry of Finance budgetary outlay for ₹220 billion towards the power & renewable energy sector for FY 2020-21.”
Falling tariffs, late payments by DISCOMs, issues of power evacuation, and the growing number of NPAs in the thermal sector are just some of the issues that have led lenders to move away from the renewable sector.
According to an official at SBI, one of the largest lenders to the solar sector among public sector banks, “We are actively financing solar projects. We breached our threshold, but continue to lend – this is the management’s discretion. Other private banks have breached the internal threshold levels for power sector lending and have decided not to lend further. Renewable energy lending has to be separated from power sector lending. The Ministry of New & Renewable Energy (MNRE) has also said this, but now the matter is with the RBI.”
In a meeting last year, Union Power Minister R.K. Singh asked the banks and financial institutions to categorize renewable energy as a separate sector, different from the power sector, so that funds can easily flow to renewable energy projects. So far, nothing has come of it yet.
The Indian solar sector has been brought to a standstill by the Coronavirus pandemic, and the future looks testing in these extraordinary times. While the government has come up with a slew of measures to get the sector back on its feet and help it remain unscathed by this invisible enemy, the future still looks gloomy, and it seems like it’s going to take a while before things get back to normal.
“Let’s be honest – renewables are the future. For the past three years, solar and wind have made up more than 50% of new power capacity. The energy transformation from fossil fuels to renewables is already happening, but lending limitations are set based on what the reality was a decade ago. It is time for RBI to recognize that solar and wind are the main new sources of energy generation in India and treat them accordingly,” Prabhu added.
Image credit: Hero Future Energies