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C. Shivkumar

Bangalore, July 24 Public sector banks, faced with continued slack credit offtake, are pitching hard for funding the big-ticket BHEL-Karnataka Power Corporation Ltd (KPCL) project. Banking sources said interest in the joint venture power project was largely due to the absence of major bankable issues, particularly in view of the public sector character of the project.

BHEL and KPCL hold a 52 per cent equity stake in the 2,400-MW project, to be located in Edlapur-Eramarus in Raichur district of Karnataka. Infrastructure Development Finance Company Ltd is expected to hold 48 per cent stake.

The cost of the power project is estimated at Rs 12,000 crore, and 80 per cent of the funding — about Rs 9,600 crore — is to be through debt. At least 70 per cent of the project cost would be for equipment, all of which would be supplied by BHEL.

Despite the high debt component, public sector banks remained unfazed. This was because the debt service coverage ratio (DSCR), a critical financing parameter for project funding, was expected to be well over the mandated 1.5.

DSCR measures the debt-carrying capacity of a project from the cash flows. Public sector banks insist on a DSCR of 1.5, though in the case of some public sector projects, lower DSCRs of 1.25 are permitted. However, state-owned banks usually prefer funding projects with high DSCRs, implying low credit risk.

Banks’ interest in State-sponsored projects is also driven by the low demand for credit from the corporate sector. Most banks are operating at incremental credit deposit ratios of less than 25 per cent.

Bulk of the funds is parked in government securities or in the reverse repurchase window of the Reserve Bank of India, translating into low-interest incomes.

The liquidity overhang consequently prompted KPCL -BHEL to take the bid route for the debt financing.

A KPCL official said: “We would like to get the finest interest rates for the debt financing.”

This was because low interest rates allowed the power tariffs from the project to be kept low. Officials said they were looking for rates as low as 10 per cent for funding the power project. However, the rate expectations imply interest rates lower than the benchmark prime lending rate. SBI’s benchmark prime lending rate is at 11.75 per cent. Specialised lending institutions such as Power Finance Corporation have lower rates, of 11.25-11.50 per cent, for State-and Centre-sponsored projects.

Power projects typically require long-term funds for up to 10 years. Banks lending rates for long-term projects are usually on a floating rate basis or have a three-year reset clause.

But KPCL officials said they were looking for fixed rate funds for the tenure of the project. This was to ensure the return on equity is protected at the prescribed level of 15.5 per cent.

The joint venture is targeted for commercial operations by 2013. When completed the project would feed to the grid at least 43 million units a day.

More Stories on : Public Sector Banks | Power | Credit Market | Bharat Heavy Electricals Ltd

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