RBI's Proposed Guidelines Could Raise Borrowing Costs for Indian Renewable Projects

Key Takeaway

• RBI's proposed guidelines may raise borrowing costs for Indian renewable projects by up to 1%, impacting green energy deployment.
• State-run bank stocks dropped 4.8% post-announcement, indicating market concerns over financing availability for capital-intensive sectors.
• Cerberus Capital eyes India's private credit market, while boutique banks see a 21% revenue increase, benefiting from high interest rates and debt restructuring demands.

RBI Draft Rules Impact on Renewables

The Reserve Bank of India (RBI) has proposed new guidelines that could potentially increase the borrowing costs for renewable energy projects by up to 1 percentage point. This move, aimed at enhancing the financial stability of infrastructure projects, mandates lenders to set aside a higher capital provision of up to 5% for loans to projects under construction, a significant increase from the current 0.4% for standard assets. According to Srishti Ahuja, a partner at EY India, this change is expected to not only raise funding costs but also make it more challenging for under-construction projects to secure financing. The impact of these proposals, if implemented, could slow down the deployment of renewable energy projects in India, affecting the country's ambitions to accelerate green energy installations for 2030 and beyond.

Market Reaction and Sectoral Impact

Following the announcement of the RBI's draft rules, Indian bank stocks, particularly those of state-run banks, have faced a downturn. A gauge of state-run banks saw a 4.8% decline, contributing to a broader banking sector index slip of 1.6%. The Nifty 50 gauge also experienced a 0.9% drop. Analysts, including Macquarie Group Ltd.'s Suresh Ganapathy and JM Financial's Sameer Bhise, have expressed concerns over the potential negative impact of these rules on the growth of capital-intensive sectors, including renewables, coal, road, and hydropower projects. The proposed guidelines necessitate a minimum exposure for banks in consortiums funding large infrastructure projects, which could lead to higher provisioning requirements and impact the availability of project finance credit.

Cerberus Capital and Boutique Banks' Response

In the midst of regulatory changes and market shifts, Cerberus Capital Management LP is eyeing opportunities in India's private credit market. The firm aims to leverage the transition of local non-bank finance lenders from corporate to consumer credit, identifying a growing demand for private credit in India's economy. Indranil Ghosh, a managing director at Cerberus, highlighted the attractiveness of India for private credit investments, despite regulatory pressures on shadow banks. Meanwhile, boutique banks have reported a 21% revenue increase in the first quarter of 2024, benefiting from high interest rates and a demand for debt restructuring advisory services. This contrasts with the largest bulge-bracket banks, which saw a decline in advisory revenues, underscoring the specialized role of boutique firms in the current financial landscape.

Street Views

• Srishti Ahuja, EY India (Neutral on the impact of RBI's proposals on renewables projects):

  "It’s definitely going to have a bearing... Besides raising the cost of funding, it will also make it more difficult for projects under construction to get financing."

Management Quotes

• Praveer Sinha, CEO of Tata Power Co. Ltd.:

  "It is very premature to comment on the impact of the proposed guidelines. It’s a consultative paper. Let’s wait and watch."