(Bloomberg) -- The Indian central bank's proposals on project financing may add as much as 1 percentage point to the borrowing costs of renewables projects, according to a top consultancy firm, potentially causing a hike in wind and solar power prices in the country.
Lenders will be needed to set aside as much as 5% of the capital they lend to infrastructure projects under construction, a draft by the Reserve Bank of India stipulates. That compares with the current norm of just 0.4% provisioning for standard assets. The allocation can come down to as low as 1% as the project matures and starts generating cash for repayment of the loan.
“It's definitely going to have a bearing,” said Srishti Ahuja, a partner for infrastructure strategy and transactions at EY India. Besides raising the cost of funding, “it will also make it more difficult for projects under construction to get financing,” she told Bloomberg Television in an interview.
If the proposals come into force, there could be a slowdown in the pace of deployment of renewables at a time when the nation is targeting to accelerate green energy installations to meet goals for 2030 and beyond. The proposed guidelines could also impact other projects, such as coal, road and hydropower, which generally have a longer gestation period.
The requirement of keeping a greater amount of money to cover any defaults typically forces banks to raise lending rates to maintain profitability.
“It is very premature” to comment on the impact of the proposed guidelines, Praveer Sinha, chief executive officer of Tata Power Co. Ltd. told reporters Wednesday. “It's a consultative paper. Let's wait and watch.”
--With assistance from Haslinda Amin and Anand Menon.
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