Banks allowed to lend more to IndianOil’s Paradip project
New Delhi   05-Sep-2008
The Reserve Bank of India (RBI) has allowed banks to lend more to state-owned refiner IndianOil’s Paradip project over and above the prescribed limit for them. The move is significant against the backdrop of some large banks such as SBI and Bank of Baroda exceeding their exposure to IndianOil as of March 2008. According to the prudential norms set out by the central bank, the exposure of banks to a single company is capped at 15% of the capital funds of the lenders. IndianOil’s proposed refinery project at Paradip in Orissa is expected to cost the oil company Rs 33,000 crore. Of which, Rs 19,000 crore will be raised as debt from local and overseas markets. At the end of March 2008, SBI had lent Rs 9,345 crore to IndianOil against its exposure limit of Rs 8,080 crore. Bank of Baroda has disbursed Rs 2,025 crore against the limit of Rs 1,538 crore. SBI Capital Market, which has been appointed by IndianOil to arrange the debt, has received a communication from the regulator that banks would be given exemption for this project on a case-to-case basis. The proposed project is said to be the largest state-owned refinery with a capacity of 15 mmtpa. Among private players, Reliance Industry is the largest player with a refining capacity of 33 mmtpa, while group company Reliance Petroleum has proposed to set up a refinery with a capacity of 27 mmtpa. Already, RBI has allowed banks to lend more to oil companies by setting a higher exposure for this sector compared with any other industry. For instance, banks cannot lend more than 25% of their capital funds to oil companies. In case banks seek to exceed this limit, they can do so by another 5%, subject to approval from their board. However, in case of any other industry, the cap is fixed at 15% and the lender can increase it to 20%, following an approval from their board. Sources said that of Rs 19,000 crore, IndianOil plans to raise Rs 15,000 crore from the local market and the balance from the overseas market. Besides, in a move to reduce the interest cost, IndianOil is also considering to raise debt on its own balance sheet for the Paradip project rather than floating a special purpose vehicle (SPV). This will help the company reduce the interest cost by 100-150 basis points. Banking sources said that the move would enable IndianOil to raise money at a rate of 12.5-13% for 14-19 years.Companies often set up an SPV to raise debt for their upcoming projects rather than taking a loan on their balance sheet. This insulates the parent company from different types of risk such as defaults on account of completing the projects in due time.