The Hindu Business Line : Speeding up private power projects — FIs, banks insist on payment security mechanism

FINANCIAL Institutions and banks have rejected the suggestion of the Power Ministry to accelerate financial closure of pending power projects without insisting on payment security mechanisms (PSM).

The Ministry has insisted that lenders take a look at power tariffs and the power purchase agreements rather than a payment security mechanism hastening financial closure.

At least 9000 mega watts (MW) of power projects were awaiting financial closure in the country. The Ministry has been attempting to accelerate the process of financial closure in a bid to avert shortfalls in the Plan target and ensure that power availability improves.

Banks have indicated that they were prepared to bring down the cost of funds for the projects to ensure that the fixed costs components of tariffs were low. In fact, most of the banks and financial institutions are prepared to provide term funds at least 200 basis points below the current prime-lending rate of 10.5 per cent.

However, lenders have indicated that projects would have to conform to lending covenants even if the tariffs are low. Mr Michael Bastian, Chairman and Managing Director of Syndicate Bank, said, "Low tariffs are fine, but project promoters have to satisfy the lenders' concerns." Among the key concerns of the lenders was the ability of the projects to meet debt service obligations since they were entirely dependent on PPAs with state-run electricity boards. Besides, none of the banks or FIs was prepared to add a large non-performing asset into their books. This, especially when they were expected to shift to the BASEL II regime that provides for tighter asset classification norms.

Bankers said that projects would have to conform to a debt service coverage ratio (the ratio of cash flow available to pay for debt to the total amount of debt payments to be made) of at least 1:3. This ratio indicates project debt carrying capacity. Any tariff fixation would, therefore, have to conform to the DSCR norms, they added. Bankers said that the DSCR itself was based on the PPAs entered into by the project promoters and bulk buyers. It was the ability of these bulk buyers to meet the payment obligations to projects that worried bankers. Few States have so far addressed this issue . Instead some of the States have preferred the route of subsidising tariffs, without compensating the utilities resulting in further erosion of finances.

Besides, the bankers pointed out that most States have built up large overdues to the Central generating stations despite the low tariffs. As a result, even Central generating stations such as the NTPC have begun insisting on PPAs that give them a right to appropriate Central transfers in the event of the defaults.

Therefore, the bankers said, it was logical to expect them to insist on a PSM. Such a PSM ensured that the loans remained as standard assets on their books. The three-stage PSM consisted of a letter of credit supported by assignment of transmission company/distribution company revenues and backed by a State Government guarantee.

In fact, it was based on the State Government guarantee that projects such as the Bellary thermal station of the Karnataka Power Corporation Ltd were able to achieve financial closure.

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