With the falling rupee, will international export financing remain a viable option for Indian developers?
Mr. Mohit Anand heads the Market Intelligence team as Senior Consultant at BRIDGE TO INDIA. Mr. Anand will be speaking on the ‘PV Landscape in India’ at the PV Manufacturing Summit in New Delhi on August 1st 2012.
As the rupee depreciates and reaches an all-time low against the dollar, projects that have opted for international financing without full or partial hedging of the debt might see a fall in cash flows.
- International financing has been the favored source of funds for project developers in India
- The Rupee has depreciated by 24% since January 2011
- The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects
Complete non-recourse debt financing is an exception rather than the norm in India. Interest rates from Indian banks are not only relatively higher but Indian banks have also not been keen on lending to the solar sector at all. Currently very few projects have claimed to have received non-recourse financing. Another trend in the market is to initially finance the project on a pure equity or recourse debt finance basis and operate the plant for up to a year. After that, developers look to refinance the projects on reduced interest rates (~11%). This refinancing option is feasible because after a year of operation, there is less risk (as construction has already finished by then) and operation data is available. Therefore, banks are more confident of financing the project on reduced interest rates. A large number of developers in the Indian solar market, though, rely heavily on international financing through Export Credit Agencies (ECAs). Module suppliers play a key role in this transaction.
Developers that have gone in for international financing are concerned. Factors like a high current account deficit, policy stagnation, low capital in-flows and strengthening of the US dollar in the wake of the Euro zone crisis have led to the depreciation of the Indian rupee by 24% since January 2011. The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects under batch one of phase one of the NSM and projects under phase one and two of the Gujarat Solar Policy. The principal and interest payments are to be made in the currency of the loan and the revenue is in the weakening Indian rupee. This is bound to nullify the cost advantage they enjoyed through a lower cost of capital. Further, the currency volatility in the last one year has also left many developers with projects under the batch two of phase one with confusion on the right hedging strategy for financing.
Following the interest rate cuts in economies like China and other Southeast Asian countries, it is expected that the Reserve Bank of India (RBI) will also cut rates. This rate cut will make fully hedged external borrowing unviable. The only reason a developer might still look for external borrowing is because Indian banks are still skeptical of lending to the sector.