It has long been argued that risk contours of debt assistance in the form of long term project finance to the infrastructure sector are considerably different from debt assistance to the industrial sector. That though there may be short term cashflow mismatches (and ensuing delay in debt servicing), the long term economic value proposition of such projects is largely untarnished over a long term given their policy prioritization, the undisputed need for their services, sovereign involvement through special schemes, etc. It is observed that Renewable Energy (RE) projects in India find it challenging to raise finance due to financiers’ taking a shorter time, liquidity based view of the business model and finding the same to be risky.
On these lines, the Securities and Exchange Board of India (SEBI) introduced the Expected Loss (EL) Rating Scale meant specifically for the infrastructure sector in July 2021. Credit Rating Agencies (CRAs) have now been empowered to assign EL ratings based on their assessment of the Probability of Default of a loan facility seen together with scenario-based recoverability of the underlying project’s economic value post such default. Public money funded financing entities such as Life Insurance Corporation of India (LIC) have reduced their credit rating based investment threshold for the infrastructure sector by factoring in the EL based ratings scale. This move has profound implications on the participation of such large public money funded financiers in the evolving Indian RE story with its vast need for finance.
The EL ratings scale’s attempt to shift the focus from single rupee single day default to a more relaxed stance on default tolerance becoming part of the investment thesis for capital market participants (especially for public insurance companies and pension companies) is an area which needs to be handled with great care and regulatory forethought. This paper attempts to discuss the nuances of the same and carries some recommendations for adding robustness to risk assessment practices for the RE finance debt pool.