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In a webinar organised by EQ International Magazine, lenders from across the industry discussed present and future prospects of lending in the domestic and international market.

The insightful session was brilliantly moderated by Karan Mitroo, Partner – Luthra & Luthra. In the opening statement, he mentioned that during the pandemic outbreak, there was a phenomenon of dead deals and now there is excess liquidity.

Financing has made a comeback with vengeance. This has invited foreign markets to the Indian RE sector due to the ESG package making the market very competitive for lenders. Here are the highlights of the session:

Rate Reduction & Competition:

Liquidity is one of the key reasons for the rate reduction. Besides this, the change in overall risk perception for the lenders and investors over time is one of the causes of rate reductions in the renewable sector. This, along with the dearth of projects and subsequent heavy competition now as compared to the past has stalled the growth. However, more projects are coming now, claimed Veenu Singla, Vice President – Kotak Infrastructure Debt Fund. He mentioned that it is a difficult market for lenders but a good time for borrowers. Single further stated that the rates are at the bottom but it appears to get better although not up to the 2016-18 level as there is more acceptance of and therefore competition in the renewable sector.

Agreeing with Singla, Gopi Krishna, Deputy General Manager – ICICI Bank said it is a good time for developers to lock in a long-term deal along with too much liquidity and few assets. About three to four years back the rate transmission was not that high but drastic rate cuts following the pandemic resulted in almost perfect rate transmission. Other factors that were responsible for this phenomenon in the past include:

– Improved corporate balance sheets.
– Better bank balance sheets.
– Reduction in global rates.
– Cumulative reduction of rates for borrowers

He warned though this is a good trend but one has to be careful of the past. Stating the 2010 rate reduction, he said that the rates were so low by the time the proposal was sanctioned and drawn down, the increase in rates was almost 2.5 per cent. Although this time, it might not be so high but there is a need to be mindful.

Construction & Refinancing

Speaking on domestic and international vendors in construction and refinancing, Atul Ranjan, DGM Project Finance – Ayana Renewable Power Pvt Ltd said domestic vendors are not as enthusiastic about construction finance as they were earlier and prefer operational projects.

He predicted that the existing liquidity can be short-termed. Infrastructure projects or renewable energy projects are 25 year projects and to achieve the targets long-term financing is needed. The mindset still supports short-term loans and will allow looking for options too. The traditional project financing lender banks that existed two-three years back became inactive. They had a clear understanding of project finance in terms of land acquisition, construction or infrastructure. The domestic banks which have become active now instead but have selective preferences for refinancing.

Ranjan said, “I would like to emphasise on domestic banks, there is a huge emphasis on clean energy financing or EAC financing… Of course, they want to do something but do they have a long-term mindset or are they willing to (take) construction risk?”

This sector is developing and will get better. MNC banks are good but cannot be seen as long-term players. They are taking more under construction risk than domestic banks, theoretically a project is happening but on a non-disposed basis. The idea should be to identify the risk and have a recourse for each of these risks on promoter and sponsor. He said, “It is better but not as good as we have been wanting it.”

Vision for RE Sector:

The present is stable thanks to solid policy support from the government of India claimed Girish Kumar Kadam, Senior Vice President – ICRA. The 500 GW capacity by 2030 target along with the overall supportive framework including Maston status, RPO norms by the SCRCs across the state are some causes that fueled this growth. Tariff competitiveness improved for wind and solar projects. For ultimate off-takers, that is the state-owned distribution utility. Marginal variable cost in the bottom 25 per cent of the merit order position is still well above Rs. 3-3.5 per unit, in that case big tariffs from solar and wind remain quite attractive from the off-takers perspective. This is why the outlook is stable and this will continue to lay solid investment traction.

“In fact as of now, at all-India level the RE capacity is about 100 GW. We expect the annual capacity addition in the renewable space in the current year to remain at about 11-12 and it will slowly inch up towards 13-14 GW every year. In fact, over the next three to four year period incrementally we expect anywhere between 60-65 GW of RE capacity to happen. And that will require almost 3-3.5 lakh crore of investment requirements… Typically these investment requirements are funded through 70:30 debt-equity-kind of a ratio to that extent that the debt funding requirements for the upcoming RE projects both in solar followed by wind and of course in the hybrid segment where the government of India has shown increasingly more focus.”

Challenges in Renewable Space:

Module price volatility and uptick in the module price environment seen over the last 10 years is not significant. PV module price jumped from less than 20 cents per watt to 28-29 cents per watt. Although the rates have started to soften, the jump is almost 40 per cent. This happened because of:

High prices of polysilicon and the subsequent supply chain disruption in China causing price hikes in module prices and needs to be watched out for.
Execution bottlenecks in terms of land acquisition, transmission, connectivity, approvals (prominently seen in wind projects). This is why we have seen a subdued progress of wind capacity installations. At India level 40-50 GW of capacity has been bid out through the competitive bidding route out of which 4-4.5 GW has been installed. Progress is below the expectation because of relatively more execution challenges in the wind segment unlike solar. Solar has comparatively lower bottlenecks.

Another challenge is counterparty credit specific concerns particularly with respect to the state DISCOM. At state DISCOMs the payment behaviour continues to remain quite mixed. Across the state DISCOMs except few like Gujarat and Karnataka, payment behaviour continues to remain erratic and mixed.

To conclude Kadam said these are the fundamental challenges in the renewable space along with the regulatory overhang in Andhra Pradesh continues to remain a matter of concern because the tariff renegotiation issue is pending at the AP high court level.

Project Financing in India & Abroad:

On describing the financing market in the country for the renewable sector, Sanjeev Gupta, Managing Director – NEXGEN Financial Solutions Pvt. Ltd. said that the entire banking sector has 11-12 lakh crores in the power sector as of March 2020. The power factor correction (PFC) and Rural Electrification Corporation (REC) cumulatively concoct 13 lakh crore rather than 7 lakh crore.

The banking sector is to put a sectoral cap that is specified by the Reserve Bank of India (RBI), which might be about 15-20 lakh crores of project financing, and two lakh crores of immediate requirement in the coming year. India alone won’t conduct this kind of lending as there will be volumes of money raised internationally.

Bond Market:

Almost 26000 crores were raised in the first half of 2021, he said. Gupta believed money has to be raised on bonds, although not enough has been seen right now. As the activeness is increasing, companies have to align with global ratings. Two Indian companies, Renew and Greenco have typically 70 per cent of the global money access from bond markets.

Since 2014, around 78000 crores have been raised and 26000 crores that Gupta has added into this. However, this is too little money to talk about, a lot of money is raised abroad.

Speaking on the bond market, Gupta said internationally, the designated currency of each country, (be it Pound, Euros, Yen or something else) will be equally viable. Along with this a lot of rupee bonds are actually being accessed. ESG remains a grateful factor as India is actually not only committed as a country but is seemingly going all out to promote renewable energy in the energy basket of the country.

Open Market: Key Drivers

Agreeing to looking beyond domestic banks and financial solutions, Mr. Vinay Ghai, Director – E&Y said that Renew, Greenco and Adani were more of the green bond takers. That segment is expanding now with Hero, Acme and various other players getting into bond financing. The market is opening, refinancing from the bond market will help them free up limits with the Indian bank as every bank has group level limits and sectoral limits. It helps free up the limits and help them raise finances domestically for the newer projects.

Another key driver is the flexible terms that these bonds offer, the back-end kind of a payment structure along with reduced interest rates and what we are also seeing is how the currency markets are behaving. He quoted, “There has been rupee depreciation in the past but if you look at all the forecasts, the Oxford forecast, for example, highlights that in the coming 3-4 years there is a 1% rupee depreciation expected. So that reduces the hedging cost also and the effective cost of borrowing international money is much attractive and also we see the spreads getting fine tuned. There is a 50-100 basis point reduction that we are seeing in the spreads as well for the green bonds that is driven by the ESG pool of capital coming towards a green bond… The bonds now have been oversubscribed by more than four times both of the two recent green bonds.”

Ghai added, “In the domestic market there is more reliance on central government projects, more financing for the key NTPC juvenile projects for example. In the bond market, there is acceptance at various state-level DISCOM projects and even C&I projects. Where players are also able to mix and match various pools of assets, capital, cash flows, and that has increased interest among the investor community. Interesting trend for India and in coming years more such alternative channels of financing are expected to open up.”

Alternative to Bonds in India:

With more capacity coming up in the next decade and debt financing is certainly scarce in domestic sources. Therefore, the need for international debt has been reinforced in the past few years. Bank debt has slowed down because they have reached their limits or stressed assets. As international banks are opting out of coal there is growing focus towards RE lending, said Nitish Shankar, Associate – GreenStone Energy Advisors.

He pointed out that out of all South Asian countries, India only provides the scale for investment in RE. Bond instruments are ideal for funding renewable assets. Among them, green bonds and sustainable link bonds are very much ideal. They are able to take counterpart risk more favourably than domestic lenders. There is liquidity in the market, they are oversubscribed. While bonds are more suited, still the renewable developers face a lot of issues for under-construction projects.

Alternatives to it could include raising term-loan through foreign lenders. So, they are also willing to take exposure to renewable energy.

It was recently observed that many global financial institutions are growing their sustainable routes. This also helps developers leverage this low decade interest rate in the developed world.

Alternative to Bonds in International Market:

There is increasing interest from multilateral banks. Recently many DFIs are coming into the market and lending to the developers. As a result the benefit is that these lenders don’t seek to maximise their returns per se. So, they are able to take some under construction and execution risks, and in a few years the interest rates reset. Among the alternatives, Shankar highlighted, “Bonds certainly are going to lead the pack but we have foreign alternatives to bonds which can be approached by the RE developers.”


Speaking of challenges, Ghai mentioned the following:
– Unattractive IRR due to increase in module price. Low equity IRRs for recently bid out projects is creating doubt in minds of lenders about viability of those projects.
– Policy related changes, like safeguard duty and BCD transition. Due to GIB-related issues, projects in Rajasthan are stalled. They have not secured financing due to uncertainties.
– Delay in signing off PPAs from SECI that is now getting on track.

Further adding to it Shankar stated, “During transaction, timeline is an issue from international banks or multilateral banks. So, the diligence time that they take or most of the time the requirements or several other internal requirements are so huge that most of the time developers are not comfortable dealing with those issues when they are raising under construction financing while they are also doing other construction works. They are also waiting for the funds, this becomes problematic for developers as well. This is a major reason that we have seen from an international bank perspective.”

The panel discussion went on to discuss various aspects of debt financing. Harvinder Singh, Head of Project Finance – Amplus Solar talked about the reduction of appetite for domestic funding last year and the challenges faced. He said, “Developers in India have demonstrated their quality. In the last 10 years, we have seen the performances of assets have been different, so, lenders have developed the perception that has reduced for this sector. So, at this point of time, few large developers have approached the national bond market and have significant interest in green bonds. Because India itself is a big market and those bond markets can’t ignore Indian bonds.”

Discussion on varied interests of IFC and AIIB institutions and ways to simplify the process of lending for them were held. Changes in the regulatory regime to ease business by the RBI or MNRE were also discussed. Prospects of financing interest are storage, battery and manufacturing, and the risks associated were also a topic of contention.

Taking the discussion further, reliance over long-term debt with higher rates or short-term debt with reduced rates or a combination of the two was talked about. Preference of domestic debt or ECBs; the longer term goals for the world bank in respect of increasing lending requirements in India for this sector; and changes personally desired to make lending easier in India.

Anand Gupta Editor - EQ Int'l Media Network