According to reports, with huge investments targets for renewable energy projects including solar and wind power, the government wants the public sector banks to consider separate limits to improve fund flow to this sector.
Bank loans to power sector have shown consistent growth. But banks give preference for conventional power projects than renewable energy units.
This issue was part of agenda at a meeting the union finance minister had with chiefs of public sector banks in Delhi on March 18, said top public sector bank executive.
The outstanding exposure rose to Rs 4, 07,200 crore in January 2013 from Rs 3, 28,900 crore in March 2012, according to Reserve Bank of India data.
Banks give preference to finance conventional power projects due to their large size and financing requirements and finance ministry feels this has led to crowding out for finance for the RE sector, official said.
The investment requirement for RE sector for the next five years has been projected at around Rs 3,00,000 crore and over 90% of it is expected to come from private sector.
Considering the importance of promoting RE sources, banks could consider carving out a separate sectoral exposure limit. This could be either through prescribing an independent exposure limit. Else, they could have a sub-limit within the exposure limit for power sector.
According to finance ministry RE is capital intensive with lower O&M costs. The risks involved are high and the viability of the project is dependent upon factors like regulatory support and technology trends. Banks charge higher interest rate for loans to RE power projects due high perceived risks.
With the smaller project size, tapping overseas markets for funds is not attractive option for them, said another bank executive. Moreover, the financial distress faced by the state power distribution companies (Discoms) pose off take risk (beyond the renewable purchase obligation) and repayment risk for RE 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 RE projects is not available, PSB official added.