Indian Banks Exposure to Coal Limits Lending to Solar, SBI Says

Indian banks have limited scope to boost lending to solar plants after funding for coal projects pushed them close to the limit for financing to the power industry, the nation’s biggest lender said.

Most banks are reaching their 15 percent cap on domestic advances to the power industry and it’s unlikely they’ll seek to separate renewable energy into another category to allow more lending, said S. Vishvanathan, chief executive officer of SBI Capital Markets Ltd., the investment banking unit of the State Bank of India. (SBIN)

“To change sectoral limits, you need approval from the board,” Vishvanathan said yesterday in an interview in Jodhpur in the state of Rajasthan. “What’s the rationale? They really are the same sector.”

A shortfall in commercial project finance could stall the solar industry in India, one of the biggest growth markets, adding to the woes of panel makers like First Solar Inc. (FSLR) and Suntech Power Holdings Co. which are looking to India and China to offset plummeting sales in Europe. India will need at least $3.2 billion of debt finance in the next three years to complete already announced solar projects, according to the Asian Development Bank.

New Technology

Government-backed development banks like the ADB, the World Bank’s International Finance Corp. and the U.S. Overseas Private Investment Corp. have spearheaded financing of solar power projects in India and are training local banks on how to assess the risks of a technology that’s new to the country.

“If solar is going to take off here, the commercial banks are going to have to do the heavy lifting,” said Michael Barrow, director of infrastructure finance in the ADB’s private sector department. “There’s not enough in our kitty or in the IFC’s or OPIC’s to finance this alone.”

Banks failed to foresee risks in India’s coal power industry which has delayed or canceled about $36 billion in new projects because of domestic fuel supply constraints. In February, India’s state-owned lenders were for the first time charging more for coal-power producers to borrow money than for wind and solar farms.

That lesson may be reinforcing local banks’ wariness about expanding into solar, a resource they are less familiar with than coal, Barrow said.

‘Dark Tunnel’

SBI Capital Markets has financed five solar projects developed by Tata Power Co., (TPWR) Kiran Energy Solar Power Pvt., Sunborne Energy Holdings LLC, Alex Astral Power Pvt. and Acme Tele Power Ltd. (ATPL)

“We really struggle to figure out the risks,” Vishvanathan said. “To a person doing it for the first time it’s like going inside a dark tunnel. We’re learning as we put our money in.”

The biggest uncertainty for lenders is the lack of ground data on solar irradiation that could affect a plant’s output, Vishvanathan said. Other factors that worry banks include the viability of solar equipment suppliers and whether they’ll survive long enough to uphold warranties over the 20-year lifetime of a plant, he said.

The financial health of India’s state-run utilities buying the solar power is also a concern for lenders. While solar projects have signed long-term contracts to sell their power at preferential rates, the cash-starved state buyers may default or try to renegotiate terms, Vishvanathan said.

“The credit risk of the buyers is a question mark. We’re not sure that they can pay the money or that they will,” he said.

To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at npearson7@bloomberg.net.

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net.

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