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FEB 09 2015

Lenders helping developers in coal auctions to avoid bad assets

  • Economic Times, ET Bureau / Hyderabad
  • Created: Mon 09th FEB 2015

In an interesting turn of events, banks and financial institutions (FIs) that have funded stranded power plants are helping developers to participate in the auction of coal fields to avoid these projects from turning into non-performing assets (NPAs).

Many power project developers can't afford to participate in the auctions, with their projects having run into delays, cost over-runs and fuel shortages. They also owe money in interest payments on loans taken earlier. Firms such as state-owned Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd (REC), which are India's largest power sector lenders, have hit upon the idea of funding their purchase of coal mines to recoup loans to these projects once they begin operations.

"We are planning to bring out some product where we will be considering the request of project developers to help them with the coal block auctions for extending financial support," a PFC executive said, requesting anonymity. Projects with a capacity of about 69,842 megawatts (MW) have been stranded in the country at various stages of development; capacity totalling 45,634MW is stalled because of insufficient coal supply, Mint reported on 22 August.

Construction has been completed on projects with a capacity to generate around 28,000MW, but these haven't been commissioned yet. Banks' exposure to the capital-intensive power sector is estimated at Rs.3 trillion, more than the total amount of gross NPAs in the banking system.

Lack of fuel supplies and absence of power purchase agreements with state-run utilities have been blamed for stranded power plants. Some project developers have not been commissioning constructed power plants because once they start production, they would have to start repaying their creditors. Confirming the trend, an REC executive who also didn't wished to be identified, said: "A lot of people have approached us for providing them with financial support for the coal block auctions.

This route is being explored to protect the loans already given out to these developers. Since it will have to be a new product we will be appointing a consultant to explore this option." For their part, banks and financial institutions that have funded these projects are not insisting that the developers set a date for the start of commercial operations. In the event that the developers default, the loans would be counted as NPAs, requiring the lenders to make additional provisions, adding to the pile-up of bad loans and denting their profitability.

"With delayed commissioning, cost over-runs and accumulating interest during construction-many of the promoters do not have the funds to even participate in the coal auction process. Lead lenders, in some cases, are willing to fund it, provided there is a change of ownership post allocation of the coal block," said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.

The National Democratic Alliance (NDA) government has received 176 bids for the 21 operational coal mines that will be put on the block in the first round of the landmark auction that will begin this month. In September, the Supreme Court cancelled the allocation of more than 200 coal mines allocated by the government between 1993 and 2010, a month after ruling that the allotments had been illegal and arbitrary and resulted in the "unfair distribution of national wealth".

The government is preparing to auction or allocate 101 coal mines. Of these, 65 will be auctioned and 36 allotted to state entities in a process to be completed before the end of the current fiscal year. The Narendra Modi government has expressed concern about the way in which loans were given to power projects totalling around 28,000 MW during the tenure of the previous government without fuel supply tie-ups and power purchase agreements, rendering them unviable.

Of India's installed power generation capacity of 255,681.46 MW, around 60%, or 154,170.89 MW, is coal-based. Growth in the production of coal has been unable to match the demand for fuel in a country where the power sector consumes nearly 78% of the domestic output of the mineral. Coal India Ltd, the world's largest coal miner, is struggling to meet rising demand for the fuel. While India's power generation capacity grew 60% over the last five years, coal production only expanded by around 6%

Tags

TOTAL Banking Renewable Energy Certificates Power Finance Corporation Finance Coal Power Generation Coal Mines United States Coal Block Rural Electrification Corporation Rural Power Deloitte India Installed Power Generation REC

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