The power ministry has written to the Cabinet Committee on Infrastructure to mandate a uniform 50% risk weight to bank loans for state-owned Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), a move which could lead to banks doubling their exposure to these companies if it finds favour with the Reserve Bank of India (RBI).
The power ministry has proposed a uniform risk weight of 50% for these two infrastructure financing companies (IFCs).
At present, banks assign low risk weight only to top-rated IFCs, while others attract 100% risk weight. The proposal also seeks to raise the overall exposure limit of banks to PFC and REC to 25% of their capital funds. As per existing norms, bank exposure limit to non-banking finance companies in infrastructure is set at 20% of the total capital fund (capital and reserves).
Risk weight is the proportion of loans which is counted towards total assets against which banks have to maintain statutory reserves. A high risk weight discourages lending by increasing the capital requirement for lenders. Under current norms, banks are allowed to assign risk weight as per their own internal assessment.
“The note to CCI addresses the key issue of increasing funds for the power sector to narrow the widening energy deficit in the country. Once the committee takes a decision, it will be for the RBI to notify the new norms,” said a power ministry official asking not to be named.
In the proposal, the power ministry has said that banks could be advised to consider only 50% of their total funding to PFC and REC as power sector exposure while determining the industry exposure decided by each bank. This could be done by lowering the risk weight on loans extended these two IFCs. By doing so, banks could either double their exposure in PFC and REC or use the released capital to increase their overall funding to the power sector while staying within specified industry exposure norms.
“We attract 100% risk weight by banks and its lowering would definitely help to mobilise more funds for the sector,” said an REC official.
As per RBI data, public sector banks have a total exposure of over Rs 3 lakh crore to the power sector at the end of last financial year. The exposure of India’s largest bank State Bank of India to the sector is over Rs 32,000 crore. The demand for funds, however, is rising sharply with estimates suggesting the power sector may require over Rs 11 lakh crore during the 12th Plan period to commission projects crucial to bridge the country’s widening energy deficit.
“We feel that banks lending to IFCs like us should carry a lower risk weight as it qualifies as indirect risk for the lender with a portion of the risk being taken by specialised institutions like us. This would also help increase fund flows to the sector,” PFC chairman and managing director Satnam Singh said.
Under current norms, banks are allowed to assign risk weight as per their own internal assessment. “If the new norms are accepted, banks will be able to lend more and the interest rates may also go down,” said an official of a public sector bank.
India has a power generation capacity of about 200,000 MW and plans to add close to 100,000 MW during the 12th Plan period. For meeting this capacity addition huge fund is required. While power companies have bee given permission to raise money through ECB route to meet part of funding requirement, larger exposure of domestic banks is also considered important to boost the sector.
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