In the recent quarters, India’s solar industry has been reeling with lending issues, among other factors related to financing. Interest rates are about 1 percent higher and availability of financing has become difficult for developers and the Prompt Corrective Action (PCA), under the Reserve Bank of India (RBI), has curbed the lending to any sector by 50 percent of the public sector banks.
The RBI is the central banking institution of the country, overseeing the entire banking infrastructure of India. Recently, after a fallout between the government and the bank’s former governor Urjit Patel, India witnessed a sudden void at the RBI, after Patel submitted his resignation citing ‘personal reasons’. Shortly after his resignation, the government appointed Shaktikanta Das as the new RBI governor.
The new governor previously worked in the Narendra Modi government as Secretary in the Department of Economic Affairs. After retiring from this post, Das was appointed as a member of the Finance Commission.
It is still too early to say if the new governor will be good for the solar sector. However, Das is expected to be more vigilant to the government’s signals in comparison to the previous governor.
The government has already made it clear as to what it expects from the new RBI governor. Recently, Minister of Coal, Piyush Goyal, expressed the government’s concerns on Prompt Corrective Action (PCA) on Twitter, saying, “Without any reference to the board of directors, suddenly on 1st April 2017, RBI drastically changed the Prompt Corrective Action framework. This is not there anywhere in the world. It was like changing the rules of the game midway into the match. This has not been debated enough.”
He added, “Would you not want the Government to at least ask questions of the revised PCA framework – what promoted you to change the rules halfway into a game? Did you discuss it with anybody, is it comparable to international norms?”
Mercom in its Q3 2018 India Solar Market Update had also highlighted the issue that public sector banks like SBI, Punjab National Bank and Bank of Baroda talk about financing, but actual loan approvals are very limited. REC Ltd, Power Finance Corporation, Indian Renewable Energy Development Agency Limited (IREDA) are the only ones that are actively lending.
After becoming the RBI governor, Das has already discussed the issue related to PCA, NBFCs, and liquidity in the market.
Any changes in the PCA, that restricts lending by 11 out of 22 public sector banks, will mean project loans may become a little bit easier to obtain compared to the current situation where financing solar projects has become increasingly challenging ; which is already hard hit by the imposition of safeguard duty and depreciation of rupee against dollar in the recent months.
The cost of borrowing has also gone up as the interest rates are about 1 percent higher this year for solar projects. The costs of hedging have also increased.
Considering we are going into an election year, it is unlikely that interest rates would be hiked further. In fact, business community is expecting the rates to stay neutral or even be reduced in the best case scenario.
The lowering of interest rates could give a much-needed boost to investment and spur solar project financing. But this may not be easy as the Monetary Policy Committee (MPC) has to be convinced about the reasons for a rate cut.
“The new RBI Governor could be a net positive for the solar industry based on the interest rate trajectory and lending difficulties faced by the solar industry currently,” said Raj Prabhu, CEO of Mercom Capital Group.
Nitin is a staff reporter at Mercomindia.com and writes on renewable energy and related sectors. Prior to Mercom, Nitin has worked for CNN IBN, India News, Agricultural Spectrum and Bureaucracy Today. He received his bachelor’s degree in Journalism & Communication from Manipal Institute of Communication at Manipal University and Master’s degree in International Relations from Jindal School of International Affairs. More articles from Nitin Kabeer