India: Clean Energy Finance Investment Program - Tranche 1 | Lessons by Independent Evaluation, Asian Development Bank

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Lessons

A dedicated credit risk team, taking charge of credit risk management and functioning independent of credit origination, is essential to improving credit underwriting.

The Indian Renewable Energy Development Agency Limited (IREDA), the financial intermediary for this program, has a risk management policy that defines its risk appetite and risk management framework. Its continuous and close association with renewable energy projects through the initial stages of the still-evolving sector has enabled it to acquire unique technical skills and understanding of the sector, which influences its lending policies. It has several policies and manuals to guide lending operations and also has credit risk management committees, a problem-solving committee, an internal review committee, and a settlement advisory committee to strengthen credit approval, monitoring, and management of recoveries. Introduction of a separate enhanced credit risk management function under a dedicated team that produces pre- and post-credit appraisal validation and performs key risk analytics for decision making will be crucial for IREDA to keep pace with its corporate plan and anticipated growth in the next 5 years when tranches 2 and 3 will be disbursed. Such function needs to be independent of credit origination and may be implemented in conjunction with the measures identified under the technical assistance provided by ADB to strengthen IREDA’s financial performance and risk management.

Project Cycle Stage:

Preparation

Implementation

Loan covenants need to be continually assessed and updated, considering changes in the operating environments.

IREDA has not complied with the required gross nonperforming loan (NPL) level of 3.9% during 2015–2019. The gross NPL ratio had already reached 4.2% in 2014. The project completion report notes that because of the adverse operating environment, specifically slow credit growth with a high number of NPLs in the financial sector, the gross NPL ratio for nonbanking finance companies in India’s infrastructure sector a grew from 1.1% to 7.5% in 2015–2018, while that of IREDA increased from 5.3% to 6.3% during the same period. The NPL covenant needs to be reexamined and updated, considering changes in the operating environment. Likewise, a gap analysis between the latest environmental and social management system updated by IREDA for the ADB credit line and ADB’s Safeguard Policy Statement needs to be undertaken in the next tranche.

Project Cycle Stage:

Preparation

Implementation

Background

In October 2014, the Asian Development Bank (ADB) approved a $500 million multitranche financing facility (MFF) for the Clean Energy Finance Investment Program for India. The MFF was to be extended to a financial intermediary, the Indian Renewable Energy Development Agency Limited (IREDA), categorized by the Reserve Bank of India as a non-deposit-taking systemically important nonbanking financial company under the administrative oversight of the Ministry of New and Renewable Energy. The 3-tranche MFF was to finance IREDA’s subproject lending for biomass, cogeneration, hydro, solar, and wind technologies. IREDA has a good track record with ADB, having received a 6-year $100 million senior loan that successfully closed in 2002. In August 2015, ADB also approved a capacity development technical assistance project to support the implementation of the MFF.

This report focuses on the tranche 1 project, signed in October 2015. The project was expected to generate 395 megawatts (MW) in renewable energy power. It was to support the attainment of the MFF’s envisaged impact of increased renewable energy infrastructure while achieving an outcome of facilitated investment in renewable energy. Its intended outputs were (i) enhanced availability of long-term financing to support renewable energy projects, and (ii) improved institutional capacity of IREDA.

At completion, the project fully disbursed the $200 million first tranche loan, supporting 9 private sector subprojects and leveraging an additional debt of $203 million and private sector equity of $146 million. It closed in September 2018, way ahead of the April 2019 target closing. An environmental and social management system (ESMS) for the credit line was published through ADB’s website in May 2014, much earlier than the December 2014 target. Compliance to ADB’s safeguard requirements was ensured through the ESMS; however, the project fell short of meeting the loan covenant to maintain nonperforming loans (NPL) at below 3.9% of disbursed subprojects.

In 2015, the NPL ratio was 5.32%; in 2016, it was 5.79%; in 2017, 6%; in 2018, 6.3%; and in 2019: 6.12%. IREDA had already taken steps to address NPL noncompliance, including (i) reducing exposure to the biomass, cogeneration, and small hydro sectors by capping lending exposure at 50% of the total project cost for new projects; (ii) strengthening credit appraisal mechanisms; and (iii) increasing monitoring to ensure that early warning signals are managed effectively. In addition, it increased provisions to improve loan loss reserves ratio, achieving a loan loss reserve ratio of 40.4% in 2019, compared to 21.6% in FY2015.

Full disbursement of the subloan facility enabled the project to achieve its outcome targets. Investments in renewable energy reached $556 million by September 2018 (target $400 million), renewable energy capacity of 481 MW (target 395 MW) was achieved, and 1.1 million metric tons (target 1.2 million metric tons) of carbon dioxide was avoided. Under the enhanced comprehensive capacity building plan for financing and credit risk management at IREDA, the financial management consultant commenced work from August 2018, ahead of the target date of September 2018.

IREDA was both the borrower and executing agency of the project.

Project Information

Project Name:

Clean Energy Finance Investment Program - Tranche 1

Report Date:

September, 2020

Main Sector:

Finance

Country:

India

Project Number:

46268-002