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Waiving bank guarantees not desirable


20 March 2020 | BRIDGE TO INDIA

Waiving bank guarantees not desirable

MNRE is understood to be in advanced stages of waiving requirements for bank guarantees by project bidders. As per a news report, MNRE is proposing that instead of bank guarantees, the developers may provide letters of comfort from one of the three government owned financial institutions – Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Indian Renewable Energy Development Agency (IREDA).

The move is motivated by a desire to free up banking lines of credit for the developers and improve ‘ease of doing business’ in the sector.

  • Reeling under bad-debts, most banks are reluctant to take fresh exposure to the sector;
  • Eligibility criteria and bid guarantee requirements in the Indian tenders are already extremely lax in comparison to international practices;
  • Relaxation in bank guarantee norms would expose DISCOMs and debt providers to undue project risks;

Bidders are currently required to provide a bank guarantee for about 1-2% of capital cost at the time of bid submission as earnest money deposit. This guarantee is released when the bid is not successful, or when the successful bidders furnish a performance bank guarantee for about 2-4% of capital cost at the time of executing the PPA. The performance bank guarantee is released on project commissioning net of any penalties for delay in achieving financial closure and/ or commissioning.

The move to relax bank guarantee norms is driven by pressure from developers hurting from tightening credit conditions and aversion of banks to lend to the sector. Share of bad-debts in total banking exposure to power sector has touched an unprecedented 18%. In most cases, the banks are insisting on 100% cash collateral for providing bank guarantees. Based on about 7,000 MW of tenders where bids have been submitted (auctions pending) and almost 38,000 MW of renewable projects under construction, total money locked up in bank guarantees is estimated at INR 50 billion (USD 675 million). For the leading developers, individual bank guarantee requirement is estimated at about INR 3-5 billion (USD 40-65 million). Including change-in-law claims for safeguard duty and GST, working capital requirement of developers has soared.

Figure: Bidding volume and pipeline for leading developers in 2019, MW

Source: BRIDGE TO INDIA research
Note: This data includes utility scale solar and wind projects. Pipeline data is applicable as of 15 March 2020.

As the 2022 deadline for 175 GW approaches, the government seems to be getting jittery about waning bidder response and undersubscription in tenders. Weak progress on commissioning – only 753 MW of renewable power capacity was commissioned in the first two months of this year – and worsening outlook due to Coronavirus disruption may be other reasons why the government is keen to appease developers.

However, at a time when project execution risks are rising and completion delays are getting worse, the move to relax bank guarantee norms seems ill advised. Eligibility criteria in the tenders are already very lax. We believe that dropping bank guarantee requirements would lead to speculative bids and expose DISCOMs and lenders to undue completion and quality risks.

If banks are wary of power sector exposure, the government ought to address their concerns rather than pass risk to public financial institutions and offtakers. Similarly, calling an end to unnecessarily destructive practices such as delays in tariff adoption by regulators, tender cancellations and payment delays would be hugely helpful to the sector.


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