In January 2019, National Solar Energy Federation of India (NSEFI) wrote to the Reserve Bank of India (RBI) to carve out a special category to allow External Commercial Borrowings (ECB) of an average maturity period of at least five years within the new merged foreign currency ECB category that will allow solar and wind project developers to repay their rupee loans to domestic lenders from ECB proceeds.

Further, NSEFI had also requested to rationalize the new ECB Framework so that it would exclude repayment of rupee loans from the negative list. As per NSEFI’s letter, if this were not done, the new framework for ECBs would pose a risk for the growth of the utility-scale renewable energy projects in India.

According to a recent letter from the Department of Economic Affairs to NSEFI, some of the issues raised by them were addressed by the RBI in July 2019.

Background

Typically, foreign lenders are not willing to take on project construction risks. Therefore, solar and wind energy developers initially borrow from domestic lenders at a high cost. Once the project is commissioned and starts generating revenue, developers refinance these high-cost rupee loans from lenders by low-cost foreign currency loans through ECBs from foreign lenders.

However, according to a notification from the RBI, the existing permissible end-use of repayment or refinancing of rupee loans availed under “Track-II of ECB” was not considered in the new merged foreign currency ECB framework in any form. This would stop developers from repaying rupee loans to domestic lenders using ECB proceeds.

RBI Relaxes End-Use Stipulations

The RBI announced that borrowers would be permitted to raise the following ECBs from recognized lenders barring foreign branches or overseas subsidiaries of Indian banks.

• ECBs with a minimum average maturity period of ten years for working capital purposes and general corporate purposes. Borrowing by NBFCs for these purposes has also been permitted.
• Eligible borrowers can avail ECBs with a minimum average maturity period of seven years for the repayment of rupee loans availed domestically for capital expenditure and also by NBFCs for on-lending for the same purposes. For repayment of rupee loans availed domestically for purposes other than capital expenditure and on-lending by NBFCs for the same, the minimum average maturity period of the ECB should be ten years.
• It was also decided by the central bank to permit eligible corporate borrowers to avail ECB for the repayment of rupee loans availed domestically for capital expenditure in the manufacturing and infrastructure sector if classified as SMA-2 or NPA, under any one-time settlement with lenders. Lending banks are also permitted to sell, through assignment, such loans to eligible ECB lenders (except foreign branches/ overseas subsidiaries of Indian banks) provided that the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.

These changes were announced in a notice issued by the RBI in July 2019. Essentially, the relaxation of these norms will allow corporates and non-banking finance companies to use ECB proceeds for working capital purposes, general purposes, and repayment of rupee loans, which was not being allowed earlier.

Raising debt for renewable energy projects is becoming increasingly difficult in India, especially since the NBFC crisis that was triggered by the collapse of IL&FS.

Earlier this year, Mercom had published a comprehensive report that talked about the financing challenges faced by small rooftop solar companies in the country.