2010-04-12

Power Crisis

Met a few power generating companies in the last few days. Power crisis is, as everyone is aware, a serious concern for India. Starting this summer, many industrial units are not getting power for almost 2-3 days in a week. And not all of them have back-up power-gen units. This results in loss of production and employment as well, because many of the workers are on daily wages.

Entrepreneurs that are putting up power plants are struggling to come to financial closure for their projects. It take about INR 5 crore per MW to put up a power plant. Only about 25 % equity comes from these entrepreneurs. Rest is contributed by banks and financial institutions. Banks are however mandated not to lend beyond a certain per cent of their capital to a single sector. And many banks are already breaching this limit. In addition, Government preempts 25 % of capital of banks through SLR.

Many of the private banks are not lending to these sectors because they have ALM issues and obvious concerns about lack of visibility into 10-15 years. Mind you, commercial banks, by definition are working capital banks - short term players. In India,they have been playing the role of term lenders. In developed markets, it is long term players like insurance and pension funds that fund such large and long-term projects. Bond markets are well developed to take care of long -term paper. In India, we do not have a well developed corporate bond market, thanks mainly to capital preemption by the government. We also do not have a benchmark rate like LIBOR.

Entrepreneurs and their representative that I met were cribbing that banks take long time to sanction loans and stipulate tight covenants. Obviously, when 75 % of risk capital is being given by the banks (read public money), the project effectively becomes the bankers'.

Capital is the second most important variable for power sector in India. The first, of course, is enabling regulation.

Government can solve these problems. But does not seem to be doing much. Power crisis will, I am afraid, continue for a longish time.


PS:
- Also read -  In defence of banks
- Was traveling for a few days. Not that you would have missed me. I missed myself though.

No comments:

2010-04-12

Power Crisis

Met a few power generating companies in the last few days. Power crisis is, as everyone is aware, a serious concern for India. Starting this summer, many industrial units are not getting power for almost 2-3 days in a week. And not all of them have back-up power-gen units. This results in loss of production and employment as well, because many of the workers are on daily wages.

Entrepreneurs that are putting up power plants are struggling to come to financial closure for their projects. It take about INR 5 crore per MW to put up a power plant. Only about 25 % equity comes from these entrepreneurs. Rest is contributed by banks and financial institutions. Banks are however mandated not to lend beyond a certain per cent of their capital to a single sector. And many banks are already breaching this limit. In addition, Government preempts 25 % of capital of banks through SLR.

Many of the private banks are not lending to these sectors because they have ALM issues and obvious concerns about lack of visibility into 10-15 years. Mind you, commercial banks, by definition are working capital banks - short term players. In India,they have been playing the role of term lenders. In developed markets, it is long term players like insurance and pension funds that fund such large and long-term projects. Bond markets are well developed to take care of long -term paper. In India, we do not have a well developed corporate bond market, thanks mainly to capital preemption by the government. We also do not have a benchmark rate like LIBOR.

Entrepreneurs and their representative that I met were cribbing that banks take long time to sanction loans and stipulate tight covenants. Obviously, when 75 % of risk capital is being given by the banks (read public money), the project effectively becomes the bankers'.

Capital is the second most important variable for power sector in India. The first, of course, is enabling regulation.

Government can solve these problems. But does not seem to be doing much. Power crisis will, I am afraid, continue for a longish time.


PS:
- Also read -  In defence of banks
- Was traveling for a few days. Not that you would have missed me. I missed myself though.

No comments: