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Home News Power Sector News Parekh panel for hiking banks’ sectoral cap for power sector

Parekh panel for hiking banks’ sectoral cap for power sector

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RBITo channelise liquidity into the power sector, a proposal is being mooted for increasing the sectoral exposure limit of commercial banks and financial institutions to the power sector to 20 per cent. The proposal is being discussed by high level committee on financing infrastructure headed by Deepak Parekh.

Currently, according to Reserve Bank of India guidelines, the exposure ceiling limits of commercial banks to the power sector are 15 per cent of capital funds in case of a single borrower and 40 per cent for a borrower group.

"The Finance Ministry representative has suggested to make a recommendation for increasing the sectoral exposure limit to 20 per cent. He underlined the need for making adequate provisions for mitigating investors' risks to augment investment in power sector," said a top official of a financial institution, who was present at the committee discussions on January 28.

However, the decision to increase the sectoral cap has to be taken by the RBI. The Deepak Parekh-headed panel is expected to send its proposal to the Finance Ministry and RBI for consideration.

Short-term bank funding is primarily required to meet working capital needs of State Electricity Distribution Utilities (Discoms), generation companies and transmission companies.n "Increasing sectoral limit to the power sector would enable availability of more funds to the sector," said Amol Kotwal, Associate Director, Energy and Power Systems Practice at Frost & Sullivan.

"It seems doubtful whether the commercial banks would agree to this proposal," Kotwal told Business Line.

The Planning Commission's working group estimated Rs 3,53,850 crore of equity and Rs 1,018,730 crore of debt investments into the power sector during the 12th Plan period. Considering the available funding options, Rs 2,63,487 crore of equity and Rs 9,21,286 crore of debt are available.

But, even if the sectoral cap is increased, it would not offer any benefits to independent power producers without fuel supply agreements and viable power purchase agreements. Banks would still be varying of lending to them as the servicing of principal and interest obligations might pose a problem, thus elevating the risk of non-performing assets.

"Increasing the sectoral limits would aid only those power producers who despite having fuel supply agreements and viable power purchase agreements were denied access to bank funding as the banks had hit their sectoral limits. It is also expected to benefit distribution and transmission companies operating under the cost plus regime, but denied funding on the ground of sectoral limits being triggered," said Salil Garg, Director (Corporate) of India Ratings.

Garg feels that banks might not be opposed to the proposal but the increased funding flexibility is expected to be used sparingly for strong credits otherwise non-performing assets will be difficult to avoid.

According to Kotwal, improvement of the financial health of State Electricity Distribution Utilities (Discoms) shall have a cascading positive impact on the financials of power generation companies.

Source- Hindu


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