Indian banks are taking larger bets on the burgeoning power sector to lift their

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sagging loan books at a time when demand for loans from companies is still relatively low, bankers and analysts said.

Banks like IDBI Bank are now key lenders to projects such as Reliance Power's 1200 MW Rosa project, while Bank of India's 108 billion rupee infrastructure loan portfolio includes major portion of power sector exposure.

"Currently, infrastructure makes up about 11 percent of bank lending, banks are looking to raise it to the 20 percent level, in which power would be an important component other than roads," Ananda Bhowmick, analyst Fitch Ratings said.

Banks facing a lower annual loan growth of 15-16 percent, compared to 27 percent as on December 2008, are looking at growth opportunities in the infrastructure space, with up to 5 percent of the loan book going towards power, analysts said.

The eleventh plan investment requirement in India's power generation sector alone is over 4 trillion rupees. Currently, about 150 power projects in the country, are at various stages of installation and planning, industry insiders said. "Power sector is showing good growth in the infrastructure space. Delinquencies are much less in power sector, helping us to lend more to the sector," S. Raman, executive director at state-run Union Bank of India said. Banks are also willing to fund a higher debt component, analysts said.

THEN AND NOW

Traditionally, banks lent up to 70 percent of project funding with much of the financing by state-run banks and specialised lenders like Power Finance Corp and Rural Electrification Corporation.

Now, banks are looking up for lending upto 80 percent of a project's need, as in the case of Adani Power's upcoming projects, an analyst with Religare Capital Markets said. Banks are also showing a preference for projects with a higher component of merchant power, or power sold in the open market, which command a higher premium, analysts said.

But, mitigating risk in power lending is a more complicated task for the banks as the money is huge and the investment cycle is longer, prompting them to opt for consortium lending and reset of interest rates every three years, analysts said.

"The reset clause reduces the interest rate risk to a large extent and helps the bank meet its asset-liability mismatch," Vaibhav Agarwal, bank analyst at Angel Broking said. However, the critical challenge faced by the sector is execution risks affecting cash flow, said Parag Jariwala, analyst at CARE Ratings. "There is always a shortage of raw material like gas or coal supply in case of thermal power projects," he said.

But there is no dearth of funds for power projects as banks, with ample surplus money, see the power sector as a good bet with government also encouraging the sector, CARE's Jariwala said. Project financing will take a major part of bank's lending to the power sector but banks are also looking at working capital needs of power utilities run by state governments, Fitch's Bhowmick said.

In July, Reliance Power's 1,200 MW power project tied up funding from a consortium of several banks arranging for the funds, while many other developers like CESC hope to see do the same in the next few months.