A

Project Report

On

“Resource Mobilization”
RURAL ELECTRIFICATION
CORPORATION”

Submitted by

Ghanshyam saraf
MBA

POORNIMA COLLEGE OF ENGINEERING

Department of Management Studies
 Acknowledgement

I would like to express my sincere gratitude to Rural Electrification Corporation for giving me the
opportunity to work on this project, and thereby familiarizing me with the practical applications of
my knowledge in the industry besides theoretical teachings in the classroom.

I wish to express my profound gratitude to Mr. Vijay kumar, for his constant guidance. He has been a
constant source of inspiration and his critical evaluations during the course in the institute have
helped me to complete this project properly.

(Signature of Student)
GHANSHYAM SARAF

2
 CONTENTS

1. Preface
2. Abstract
3. Rural electrification
4. Borrowing pattern
5. Research and Methodology
6. Company profile
7. Credit rating
8. Mission and objectives
9. RGGVY scheme
10. Indian Electricity Demand
11. Category of financed by REC
12. Financing
13. Bankers and peer group

14. REC borrowings

15. Achievements of REC
16. SWOT Analysis
17. Conclusion
18. Bibliography

Preface
3
Rural Electrification Corporation Limited (REC) was incorporated on July 25, 1969 under the
Companies Act 1956. REC is a listed Government of India Public Sector Enterprise with a net worth
of Rs. 5368 Crore. Its main objective is to finance and promote rural electrification projects all over
the country. It provides financial assistance to State Electricity Boards, State Government
Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by
them.
Resources are the most important part of any organization. There are various types of resources
pertaining to each functional or operational sector of any organization. Generally the resources which
are mostly used are not abundant so they must be utilized intelligently and in a smart way so that we
can gain maximum from it, this type of utilization of resources is called optimum utilization of
resources.
Resources should not be overutlised neither they should remain underused.
Rural Electrification Corporation is a company which gives loan or funds to those companies which
are involved in the generation of power or transmission of power in rural area. So funds are the
prominent resources for rural electrification corporation so they must be utilized wisely or we can say
they must be utilized optimally so that we can gain maximum from it.

Abstract

4
Rural Electrification Corporation is the company which mainly gives loan to the rural sector
companies for the generation, transmission and distribution of power in the rural areas. It works
under RGGVY i.e. Rajeev Gandhi Gram vidhuytikaran yojana. This promotes the generation and
distribution of electricity for the rural areas people.
Now for providing loan or funds to the company it requires fund raising resources. It gets funds from
various resources like by issuing bonds to the public, issuing shares to the public through issue public
offer (IPO), from government under RGGVY scheme, from foreign resources like from japan, and by
taking loan from various commercial or development banks.these are the various fund raising
resources of REC. after collecting money from various resources, they disburse loan to various
company on the basis of their demand, considering actual requirement or the use of resources to
generate maximum electricity from the given resources.
As money or these resources are scarce for REC so they should be properly utilized or we can say
they should optimally utilized.

INTRODUCTION
5
Rural electrification
REC is a public financial institution in the Indian power infrastructure sector. It is engaged in the
financing and promotion of transmission, distribution and generation projects throughout India. It
believes that REC occupies a key position in the GoI's plans for the growth of the Indian power
sector.

It assist its clients in formulating and implementing a broad array of power projects and finance those
projects. Its clients primarily include Indian public sector power utilities at the central and state levels
and private sector power utilities. It services its clients through a network of project offices spread
across India and one national level training centre at Hyderabad. Its project offices play an integral
role in the development of its relationships with its clients, the operation and promotion of its
business and in its loan appraisal, loan sanction and post-sanction monitoring processes. Its primary
financial product is project-based long-term loans. It funds its business with market borrowings of
various maturities, including bonds and term loans. Because its sources enable it to raise funds at
competitive costs, it is able to price its financial products competitively.

It commenced its operations in 1969 for the purpose of developing the power infrastructure in rural
areas. It has contributed to the development of rural India and India's agriculture through its funding
of transmission and distribution projects in rural areas. Its mandate has evolved in accordance with
the development priorities of the GoI and, since Fiscal 2003, permits it to finance all segments of the
power sector, including generation, throughout the country. For Fiscal 2009, more than half of its
loan sanctions related to generation projects and generation-related loan assets currently comprise
more than a third of its total loan assets. In September 2009, its mandate was further extended to
include financing other activities with linkages to power projects, such as coal and other mining
activities, fuel supply arrangements for the power sector and other power-related infrastructure

REC has experienced growing demand for its financial products, and therefore have demonstrated
consistent growth in the business.

• Its loan sanctions and loan disbursements have grown at a CAGR of 25.71% and 23.23%,
respectively, between Fiscal 2005 and Fiscal 2009.

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 • For Fiscal 2010, REC sanctioned Rs. 453 billion of loans, including Rs. 240 billion relating to
generation projects, Rs. 172 billion relating to transmission and distribution projects and Rs.
41 billion under short-term loans.

• For Fiscal 2010, it disbursed Rs. 211 billion of loans, including Rs. 83 billion relating to
generation projects, Rs. 90 billion relating to transmission and distribution projects and Rs. 38
billion under short-term loans.

• REC’s loan assets have grown at a CAGR of 24.07% from Rs. 216,844 million in Fiscal 2005
to Rs. 660 billion in Fiscal 2010 as per its unconsolidated restated financial statements.

• Company’s profit after tax as per its consolidated restated financial statements for Fiscal
2008, 2009 and 2010 was Rs. 9,587 million, Rs. 13,865 million and Rs. 20 billion,
respectively.

• As on March 31 2010, REC had total assets of Rs 67021 crores and a net worth of Rs. 11,080
crores as per its consolidated restated financial statement.

Jharkhand, Bihar, Uttar Pradesh, Orissa, Uttranchal, Madhya Pradesh etc are some of the states
where significant number (more than 10%) of villages are yet to be electrified.

• Number of Villages (1991 Census) - 593,732

• Villages Electrified (30 May 2006) - 488,173
• Village level Electrification % - 82.2%

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Borrowing Pattern:

Taxable bonds. REC issue secured non-convertible redeemable taxable bonds typically with
a maturity of three to ten years from the date of issuance and bearing a fixed interest rate that
depends upon market conditions at the time of issuance. The weighted average interest rate on
taxable bonds issued during the six months ended September 30, 2009, Fiscal 2009, Fiscal 2008,
Fiscal 2007 and Fiscal 2006 was 8.18%, 10.64%, 9.49% and 8.85%, and 7.66%, respectively.
The weighted average annual interest rate on all of its outstanding taxable bonds as on
September 30, 2009 was 8.95%. The taxable bonds are offered on a domestic private placement
basis and listed on the “whole sale debt market segment” of the NSE.

54EC long term tax exemption bonds. REC began issuing 54EC long term tax
exemption bonds in Fiscal 2001. Under Section 54EC of the Income Tax Act, 1961, holders of
such bonds are exempt from taxes arising on capital gains from prior investments invested in
these bonds, subject to limits and qualifications. REC is able to price such bonds at a lower rate
of interest than would otherwise be available. In order to qualify for the tax exemption, these
bonds must be held for no less than three years. These bonds typically have put dates or maturity
dates at three years from issuance. The availability of the tax exemption in connection with these
bonds is reviewed annually by the GoI in connection with the annual implementation of the
Finance Act. Since January 2007, the GoI has limited that amount of our bonds that an individual
investor can utilize to offset capital gains to Rs. 5 million which has reduced the amount of
bonds we have been able to offer for subsequent periods. The weighted average annual interest
rate on 54EC long term tax exemption bonds issued during the six months ended September 30,
2009, Fiscal 2009, Fiscal 2008, Fiscal 2007 and Fiscal 2006 was 6.25%, 6.01%, 5.50%, 5.40%
and 5.54%, respectively. The weighted annual average interest rate on all of its outstanding
54EC long term tax exemption bonds, as on September 30, 2009 was 5.56%. The 54EC long
term tax exemption bonds are offered on a domestic private placement basis and are not listed on
any exchange.

Infrastructure bonds. REC began issuing our infrastructure bonds in Fiscal 2002. Under
provisions of the Income Tax Act 1961, investments in these bonds offset taxable income of the
bondholders, subject to limitations and qualifications, and it is therefore able to price such bonds
at a lower rate of interest than would otherwise have been available. The availability of the tax
exemption in connection with these bonds is reviewed annually by the GoI in connection with
the annual implementation of the Finance Act. We have not issued infrastructure bonds since
Fiscal 2006 due to an amendment in Income Tax Act 1961. The weighted average interest annual

8
rate on all of the outstanding infrastructure bonds as on September 30, 2009 was 6.17%. Its
infrastructure bonds typically have a maturity of three or five years from the date of issuance and
bear a fixed interest rate. The infrastructure bonds were offered on a domestic private placement
basis and are not listed on any exchange.

Tax-free bonds. REC has not issued tax-free bonds since Fiscal 2002. Under provisions of
the Income Tax Act, 1961, interest on these bonds was tax exempt for bondholders and it was
therefore able to price such bonds at a lower rate of interest than would otherwise have been
available. Its currently 75 outstanding tax-free bonds typically have a redemption date in 2014
and bear a fixed interest at 7.22% per annum. The weighted average annual interest rate on all of
its outstanding tax-free bonds as on September 30, 2009 was 7.79%. The tax-free bonds were
offered on a domestic private placement basis and listed on the “whole sale debt market
segment” of the NSE.

SLR bonds. REC has not issued SLR bonds since Fiscal 1999. SLR bonds were issued
pursuant to permission granted by the RBI and are guaranteed by the GoI. SLR bonds typically
have a maturity of ten or twenty years from the date of issuance and bear a fixed interest rate that
depended upon market conditions at the time of issuance. The weighted average annual interest
rate on all of its outstanding SLR bonds as on September 30, 2009 was 11.65% The SLR bonds
were offered on a domestic private placement basis on the terms specified by the RBI and listed
on the “whole sale debt market segment” of the NSE.

Term loans from commercial banks and financial institutions. As on September

30, 2009 it had a total of 34 Rupee denominated term loan facilities from commercial banks and
financial institutions, 18 of which were secured and 16 of which were unsecured. These facilities
are obtained on commercial terms and have varying maturity dates and interest rates. The
weighted average annual interest rate on all new borrowings under our term loan facilities from
commercial banks and financial institutions during the six months ended September 30, 2009,
Fiscal 2009, Fiscal 2008, Fiscal 2007 and Fiscal 2006 was 7.01%, 8.85%, 8.80%, 8.81% and
7.21%, respectively. The weighted average annual interest rate on all of its outstanding
indebtedness under term loan facilities from commercial banks and financial institutions as on
September 30, 2009 was 7.57%.

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Foreign Currency Resources
REC first began arranging for foreign currency borrowings during Fiscal 2007. As on September
30, 2009, it had foreign currency borrowing facilities that provided for an aggregate availability
equivalent to Rs. 40,693 million, of which REC had outstanding Rs. 16,829 million. Commercial
borrowings in foreign currency. In Fiscal 2007, we entered into a syndicated loan agreement
through Standard Chartered Bank, London and DEPFA Investment Bank Limited, Cyprus for the
Japanese Yen equivalent of US$200 million (which, at the time of draw-down, equated to JPY
23,570 million). Loans under this agreement bear a variable interest at a spread of 48 basis points
over six-month JPY libor and mature in 2012. As on September 30, 2009, this loan facility was
fully drawn. As on September 30, 2009, REC’s effective annual cost of funds under this
agreement (after hedging fully) was 6.75%. On April 23, 2007, Standard Chartered Bank,
London and DEPFA Investment Bank Limited, Cyprus entered into a separate agreement
pursuant to which they transferred a part of respective shares of their loans to nine different
lenders.

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 Research and Methodology

Exploratory research studies are also termed as formulative research studies. The main purpose of
such studies is that of formulating a problem for more precise investigation or of developing the
working hypothesis from an operational point of view. The major emphasis in such studies is on the
discovery of ideas and insights. As such the research design appropriate for such studies must be
flexible enough to provide opportunity for considering different aspects of a problem under study.

In the case of exploratory research the focus is on the discovery of ideas. In a business
where sales have been declining for the past few months, the management may conduct a quick study
to find out what could be the possible explanations the sales might have declined on account of a
number of factors, such as the detoriation in the quality of the product, increased competition,
inadequate or ineffective advertising, lack of trained salesman or use of the wrong channels of
distribution. In such a case an exploratory study may be conducted to find the most likely cause.

In the current the focus is on the proper utilization of funding resources of the
company in order to gain maximum from it. So this is the prime case of this type of design where we
during my study on the funding resources I have to get into details of various things regarding the
company, various factors relating to it.

An exploratory study is generally based on the secondary data that are readily available.
It does not have a formal rigid designas the researcher may have to change this focus or direction,
depending on the availability of new ideas and relationships among variables. An exploratory study
is in the nature of preliminary investigation wherein the researcher himself is not sufficiently
knowledgeable and is, therefore, unable toframe detailed research questions.
Here I have used the past and standard data relating to the funding resources or from where the
resources could be taken.

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 Core study

Company profile

Rural Electrification Corporation Limited (REC), was incorporated on July 25, 1969 under the
Companies Act 1956. REC is a listed Government of India Public Sector Enterprise with a net worth
of Rs. 5368 Crore. Its main objective is to finance and promote rural electrification projects all over
the country. It provides financial assistance to State Electricity Boards, State Government
Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by
them.

REC provides loan assistance to SEBs/State Power Utilities for investments in rural electrification
schemes through its Corporate Office located at New Delhi and 17 field units (Project Offices),
which are located in most of the States.

The Project Offices in the States coordinate the programmes of REC’s financing with the concerned
SEBs/State Power Utilities and facilitate in formulation of schemes, loan sanction and disbursement
and implementation of schemes by the concerned SEBs/State Power Utilities.

NAVRATNA STATUS
There was yet another historic achievement for your Company in May 2008 when it was
conferred “Navratna” Status by the Government of India. This is the highest recognition for any
Central Public Sector Enterprise (CPSE) and only a few selected CPSEs in the country enjoy this
elite status.

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 Credit Rating of REC-Domestic

Rating Rating Assigned Remarks

Agency
CARE Long TermInstruments with this rating are considered to be of the best
Borrowing credit quality, offering highest safety for timely servicing
“CARE AAA” of debt obligation
Short TermInstruments with this rating have strong capacity for timely
Borrowing payment of short term debt obligations and carry lowest
“PR1+” credit risk.
FITCH Long TermHighest rating for Long Term borrowings.
Borrowing
“AAA (ind)” Highest rating for Short Term borrowings.
Short Term
Borrowing
“F1+”
ICRA Long TermHighest credit quality rating for Long Term borrowings.
Borrowing Carries lowest credit risk.
“LAAA” Highest credit quality rating for Short Term borrowings.
Short Term
Borrowing
“A1+”
CRISIL Long TermIndicates highest degree of safety for timely payment of
Borrowing interest & principal.
“AAA/Stable” Highest rating for Short Term borrowings.
Short Term
Borrowing
“P1+”

Credit Rating of REC-International

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Rating Agency Rating Assigned Remarks

Moody’s Baa3 Investment Grade, equal to sovereign rating of

India.
FITCH BBB- Investment Grade, equal to sovereign rating of
India.

Mission

 To facilitate availability of electricity for accelerated growth and for enrichment of quality of
life of rural and urban population.
 To act as a competitive, client-friendly and development oriented organisation for financing
and promoting projects covering power generation, power conservation, power transmission
and power distribution network in the country.

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OBJECTIVES
In furtherance of the Mission, the main objectives to be achieved by the Corporation are:

  To promote and fnance projects aimed at integrated system improvement, power

generation, promotion of decentralized and non-conventional energy sources, energy
conservation, renovation and maintenance, power distribution with focus on pump set
energisation, implementation of Rajiv Gandhi Grameen Vidyutikaran Yojana, a
Government of India scheme for rural electricity infrastructure and household
electrifcation.
  To expand and diversify into other related areas and activities like financing of
decentralized power generation projects, use of new and renewable energy sources,
consultancy services, transmission, sub-transmission and distribution systems,
renovation, modernization & maintenance etc. for optimization of reliability of power
supply to rural and urban areas including remote, hill, desert, tribal, reverie and other
difficult/remote areas.
 To mobilize funds from various sources including raising of funds from domestic and
international agencies and sanction loans to the State Electricity Boards, Power
Utilities, State Governments, Rural Electric Cooperatives, Non-Government
Organizations (NGOs) and private power developers.
 To optimize the rate of economic and financial returns for its operations while
fulfilling the corporate goals viz
 laying of power infrastructure;
 power load development;
 rapid socio-economic development of rural and urban areas, and
 Technology up-gradation.
 To ensure client satisfaction and safeguard customers’ interests
through mutual trust and self respect within the organization as well
as with business partners by effecting continuous improvement in
operations and providing the requisite services.
 To assist State Electricity Boards/Power Utilities/State Governments, Rural Electric
Cooperatives and other loanees by providing technical guidance, consultancy services
and training facilities for formulation of economically and financially viable schemes
and for accelerating the growth of rural and urban India.

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Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY)

 Government of India, in April 2005, launched the scheme “Rajiv Gandhi Grameen
Vidyutikaran Yojana (RGGVY) – Scheme of Rural Electricity Infrastructure and
Household Electrification”; vide OM No. 44/19/2004

16
  D (RE), dated 18th March 2005, for the attainment of the National Common
Minimum Programme (NCMP) goal of providing access to electricity to all
households in five years. The scheme is being implemented through REC. Under the
scheme ninety per cent capital subsidy is being provided by Govt. of India for overall
cost of
 The projects.
 This approval was for implementation of Phase I of the scheme for capital subsidy of
Rs.5000 crore during the 10th Plan period. 235 projects covering 178948 villages
(67012 unelectrified and 111936 electrified villages) with the total sanctioned project
cost of Rs. 9696 crore were sanctioned for implementation by the Ministry of Power
in X Plan period. Further sanction for continuation of the scheme in XI Plan for
attaining the goal of providing access to electricity to all households, electrification of
about 1.15 lakh un-electrified villages and electricity connections to 2.34 crore BPL
households by 2009 has been conveyed vide OM No. 44/37/07-D(RE) dated 6thFeb.
2008 issued by Ministry of Power.316 projects covering 282164 villages (47658
unelectrified and 234506 electrified villages) with the total sanctioned project cost of
Rs. 15553.22 crore have been sanctioned for implementation in XI Plan period by the
Ministry of Power during 2007-08.Under the scheme, it has been reported that works
have been completed for 38,262 villages (including9301 un-electrified and 28961
electrified villages) and connections to 20.41 Lakh rural households including16.21
Lakh BPL households have been provided during2007-08.Cumulatively, works in
88,664 villages (47826 unelectrified and 40838 electrified villages) have been
completed and connections to 27.71 Lakh rural households including 22.93 Lakh BPL
households have been released under the scheme up to 31.03.2008.

INDIAN ELECTRICITY DEMAND

Historically, the power industry in India has been characterized by energy shortages.

The following graph presents the gap between requirement and supply of electricity in India from
fiscal 1999 to 2006:

17
Although power generation capacity in India has increased substantially in recent years, it has not
kept pace with the growth in demand or the growth of the economy generally. According to India’s
Central Electricity Authority, during fiscal 2007 India’s total energy shortage was 68,341 million
units, or 9.9% of its total requirements, and India’s peak shortage was 13,610 million units, or 13.5%
of peak demand requirements.

On a per capita basis, energy consumption in India is relatively low in comparison to much of the rest
of the world, including other developing nations. According to MoP data, in 2001, India’s per capita
electricity consumption was 408 units per year, as compared to a world average of 2,326 and yearly
per capita consumptions of 2,642 units in Middle Eastern countries, 1,419 units in Latin America
countries, 1,093 units in China, 549 units for Asian countries and 515 units for African countries.
However, according to data from the MoP, per capita consumption of energy in India is projected to
increase to 932 units per year by fiscal 2012.

As India’s economy continues to grow, it is expected that India’s energy consumption will grow as
well. The GoI has adopted a system of successive Five Year Plans that set out targets for economic
development in various sectors, including the power sector. According to the Planning Commissionof
India, the Indian economy has grown at an average of 8% for the past three years. The Eleventh Plan,
which covers fiscal 2008 through 2012 targets an average growth rate of 9% for the plan period and
according to data from the MoP, in order for India to maintain a sustained growth of 8% to 9% per
annum through the next 25 years and meet the energy needs of all citizens, India would need to
increase its primary energy supply by three to four times and electricity generation capacity by about
six times.

In order to match the increasing demand for power within India, substantial increases in generation
capacity will be required, which will require additional improved transmission and distribution
systems, all of which will require significant investment. According to data from the MoP, as on
March 31, 2007, India's power generation systems had a total installed capacity of 132,330 MW.
According to data from the MoP, an additional 78,577 MW are required to meet the projected
demand during the Eleventh Plan. The overall requirement of funds in the Eleventh Plan for the
power sector has been estimated at Rs. 10,316,000 million.

REGULATORY, LEGAL AND POLICY ENVIRONMENT IN THE POWER SECTOR

In recent years, in light of India’s persistent power shortages, the GoI has taken significant action to
restructure the power sector to improve its commercial and financial viability and to attract
investments in this sector.

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General

The most significant reform package has been the introduction of the Electricity Act, 2003, which
has modified the legal framework governing the electricity sector and has been designed to address
systemic deficiencies in the Indian power sector and to attract capital for large-scale power projects.
The Electricity Act is a central unified legislation and replaces the multiple legislations that
previously governed the Indian electricity sector. The objective is to introduce competition, protect
consumer’s interests and provide power for all. Under the Electricity Act, the regulatory regime is
more flexible than under prior legislation and allows regulatory commissions greater freedom in
determining tariffs. Additionally, the Electricity Act also provides for rural electrification, open
access in power transmission and distribution, de-licensing of power generation and distribution and
power trading.

The GoI notified the National Electricity Policy in February 2005. This policy aims to accelerate the
development of the power sector, to provide supply of electricity to all areas and to protect the
interests of consumers and other stakeholders, with attention on the availability of energy resources,
the technology available to exploit these resources, the economics of generation using different
resources and energy security issues. The salient features of this policy include:

• The access to electricity for all households in the next five years from the date of the policy;

• The availability of power to fully meet demand by 2012;

• The supply of reliable and quality power in an efficient manner and at reasonable rates;

• The increase of per capita availability of electricity to over 1,000 units by 2012;

• Minimum lifeline consumption of 1 unit per household per day as a merit good by year
2012;

• The financial turnaround and commercial viability of the electricity sector; and

• The protection of consumer interests.

The GoI notified the National Tariff Policy in January 2006. This policy aims to ensure financial
viability of the power sector, attract investments, ensure availability of electricity to consumers at
reasonable rates, and promote transparency and consistency in regulatory approach for tariff setting.

Rural

19
The GoI undertook a number of initiatives over the years for rural electrification, including Kutir
Jyoti Yojana, Minimum Needs Programme, Pradhan Mantri Gramodaya Yojana (PMGY),
Accelerated Rural Electrification Program (AREP), Accelerated Electrification of One Lakh Villages
and One Crore Households. However, to further strengthen the pace of rural electrification and with
an objective to electrify all villages and provide access to electricity to all rural households by year
2009, the GoI launched the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in April 2005 as
a new comprehensive programme merging within it all the ongoing schemes.

In order to achieve the electrification of villages, the scheme envisages the creation of a rural
electricity distribution backbone with atleast one 33/11KV sub-stations of adequate capacity in
geographical blocks where these do not exist, a village electrification infrastructure with distribution
transformers of appropriate capacity in villages and other habitations and decentralised distribution
generation systems based on conventional sources where grid electricity supply is not feasible or cost
effective. This infrastructure would service the requirements of agriculture and other activities in
rural areas including irrigation pumpsets, small and medium industries, local industries, warehousing,
healthcare, education and information technology in order to facilitate overall rural development,
generate employment opportunities and alleviate rural poverty.

The GoI also notified the Rural Electrification Policy in August 2006. This policy aims at improving
the access and quality of electricity supply in rural areas. The salient features of the policy are:

• The provision of access to electricity to all households by year 2009;

• The supply of reliable and quality power at reasonable rates;

• Minimum lifeline consumption of 1 unit per household per day as a merit good by year
2012.

Product profile

CATEGORY OF SCHEMES FINANCED BY REC

CATEGORY PURPOSE

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Project Household Electrification P:RHhE
Project Village Electrification: P:VE (SG)
Project Dalit Basti: P:DB(SG)
Project Hamlet Electrification: P:HE(SG)
Project Village Electrification: P:VE
Project Intensive Electrification: P:IE
Project Dalit Basti: P:DB
Project Hamlet Electrification: P:HE
Project Pumpsets: SPA:PE
Project system Improvement: P:SI
Project Comprehensive System Improvement:
P:CSI
SI:Meters, Transformers, Conductors,
capacitors etc.
Short Term Loan
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Accelerated Electrification of one Lakh villages
and one crore households
Aims at Electrification of unelectrified villages
in a selected designated area
Aims at Electrification of unelectrified tribal
/dalit bastis by release of Household, Street
Light and other connections
Aims at Electrification of unelectrified hamlets
by release of Household, Street Light and other
connections
Aims at electrification of new villages including
electrification of left out hamlets in a selected
designated area
To cover intensive load development for
providing connections to rural consumers in
already electrified areas
To cover electrification of dalit bastis located in
the electrified areas by release of house hold and
street light connections
To cover electrification of hamlets located in the
electrified areas by release of house hold and
street light connections
Aims at energisation of pumpsets
To strengthen and improve the transmission, sub
transmission and distribution system in the
designated area
To meet system inadequacy of entire system
from LT Distribution to Sub transmission and
transmission level of a given geographical area
For procurement and installation of meters,
transformers and capacitors etc.
To provide finance to the Power Utilities and
State Governments to meet their working capital
requirement for different purposes, such as
purchase of fuel for power plant, purchase of
power, purchase of material and minor
equipment, system and network maintenance
including transformer repairs, etc.
 The Scheme aims to facilitate reduction of the
cost of borrowings of State Power
Utilities/highly rated private power utilities by
Debt Refinancing
repaying their high cost term loans raised from
other Banks/Financial Institutions for eligible
projects/schemes.
To provide Short term Loan/Medium term loan
Financing Equipment manufacturers to the manufacturers of Power/Electrical
material for power project.
Development of rural electric cooperative
RE Cooperatives
societies
Covers all types of schemes irrespective of
Generation
nature, size and source of generation.

Financing

"Financing" refers to the borrowed capital, in monetary form, that allows the continuance of long-
term projects. Financing is procured from financial markets or institutions ranging from multilateral
and bilateral banks to commercial lenders, to investors and co-operative associations. Financing
instruments include grants, loans, equity investment, guarantees, and less conventional exchange
mechanisms such as emission reduction certificates created by the Kyoto Protocol’s Clean
Development Mechanism (CDM). Definitions of these instruments are found in Appendix III of this
guide. Financing for development programmes takes place on two levels. First, the governments of
developing countries can apply to international financial organisations dedicated to providing
development funding. This kind of financing, called “international concessionary financing,” is
available mainly in the form of loans (though grants are sometimes made), which the developing
22
country will then distribute internally to a variety of development projects. Other international
funding organisations include foundations, which are typically private, non-profit organizations
dedicated to providing grants or soft loans for development within their specialisation.
Somefoundations are dedicated to solar home system installation, while others have a more general
approach embracing renewable energy or sustainable development.
The second financing level is the national or commercial level. Many national governments have
established funds earmarked for development or electrification work. They build these funds through
taxes on conventional energy sources or on grid electrification. Commercial banks can also be a
source for loans when the programme or project meets their return-on-investment (ROI) guidelines.
Small local banks can be particularly helpful in funding local development or facilitating end-user
financing for local projects. Large international banks rival the international concessionary scene in
size and can be an important source of financing for programmes or projects that meet their
guidelines. Individual projects, which might be managed by government ministers, non-
governmental organisations (NGOs), co-operatives, or even private contractors, often have more
access to financing at the national or commercial level than at the international concessionary level,
though they can link to international concessionary financing through cooperation with national
programmes.

BASIC FINANCING CONCEPTS

Before looking at the different sources of development financing, programme developers should
understand the basic rules of the financing process. Overall, financial institutions will be creating a
package that includes the total finance amount and: a) the repayment terms, b) the interest rate, c) the
repayment schedule, d) any guarantees or securities. Organisations that provide financing are
concerned with three core conditions: the risk inherent in making a loan or providing funding, the
security that will offset risks undertaken, and finally, the return expected on their investment.

23
Barriers to Financing
PV programme designers are likely to encounter some very specific barriers to arranging
financing. First, securing financing from large multilateral and bilateral development banks can be a
lengthy and complicated process. Access to the large development funders is also often restricted to
national government representatives or to projects with national governments as partners. In addition,
most development funders will have sets of guidelines and requirementsthat must be met in order to
receiving financing. These can include partnerships with other organisations, location in a specific
region, or use of a specific technology. These requirements can change from year to year, meaning
that programme planners must be flexible and stay informed of the requirements and processes set
out by the development lenders.
Second, lenders tend to avoid projects if they believe the technology is unproven or that the market
for PV has not been established. While multilateral and bilateral development banks and
development foundations will be more tolerant of emerging technologies, commercial lending and
investment organisations are especially likely to perceive PV development programmes as “high-
risk” because of their unfamiliarity with the technology or lack of experience with development
situations. This is exacerbated by the fact that financial institutions have difficulty finding well-
informed advice about PV system financing . Another barrier to project financing is the size of the
financing package requested. Lenders are most interested in making large loans to well-established
companies providing predictably profitable services. PV programme funding requirements are often
relatively low, especially by the standards of commercial lending and investment organisations. A
small loan requires just as much administrative effort as a large loan and therefore has proportionally
higher costs per amount of return8. To respond this concern, programme developers need to be
prepared to demonstrate the profitability as well as the non-financial merits of the project, in other
words they need to be able to “sell” their project.

Rural Electrification

According to data available from the MoP, in India, out of estimated 587,556 villages about 150,000
are yet to be electrified. According to data available from the MoP, the states of Uttar Pradesh, Bihar,
West Bengal, Uttaranchal, Jharkhand, Orissa, Assam, Meghalaya had over 80% villages and 56.5%
of the rural households in the country that were yet to be electrified. The states of Himachal Pradesh,
Goa, Punjab, Haryana, Sikkim, and Jammu and Kashmir, constituting about 6% of country’s
totalrural households, had achieved electrification in respect of over 75% of the rural households.
However, the states of Bihar, Jharkhand, Assam, Orissa, Uttar Pradesh, and West Bengal,
constituting 43% of country’s total rural households still had 80% or more households that were yet
to be electrified. 60.18 million or 43.5% of the rural households have been electrified, and 56.5% or
78.09 million are yet to be electrified.
24
The tables below show the pace of rural electrification of villages and households in some states in
the country, as on March 31, 2007:

Village Electrification State Villages to be electrified Percentage

Uttar Pradesh 40,389 42%

Bihar 20,449 53%

West Bengal 7,694 20%

Uttaranchal 2,785 18%

Jharkhand 22,920 78%

Orissa 9,682 21%

Assam 5,640 23%

Meghalaya 2,754 50%

Sikkim 75% 68,808

25
 States with 80% or more households yet to be Percentage Number of Households
electrified State

Bihar 95% 12,010,504

Jharkhand 90% 3,422,425

Assam 83.5% 3,522,331

Orissa 80.6% 6,651,135

Uttar Pradesh 80% 16,505,786

West Bengal 79.7% 8,899,353

Total 51,011,534

AVAILABLE FINANCING: OVERVIEW OF SOURCES

26
Financing for decentralised energy development projects comes in three principal
categories: international concessionary financing, national development financing, and
commercial financing. Depending on whether the organisation seeking financing is a
public entity (host governments or bilateral agencies) or a private institution (private
developers, non-government organisations), it will have access to different financial
sources. As noted above, many large development funding organisations limit access to
national government representatives or to projects partnered with national governments.

International Concessionary Financing

Funding to host governments is available through international sources like multilateral
development banks (MDBs) maintained by international development organisations,
through bilateral agencies, through private funds and foundations, and through green
investment mechanisms. International concessionary financing is most often arranged in
the form of loans, but some grants are also made. Loans from international development
agencies might be madeat commercial rates, or at subsidised or “soft” rates10. The large
development banks also offer guarantees to mitigate the risk of the project and facilitate
other forms of financing (such as loans from commercial sources). Funding through
multilateral development banks and bilateral development banks is called Official
Development Assistance (ODA).

National Development Financing

The national governments of nearly every developing country have funds dedicated to
development issues. In fact, 80% of total development investment comes from domestic
finance accounts, with the other 20% coming from international and other financial
sources. At the national level, there are also non-governmental organisations and co-
operatives, which while they may or may not have the ability to finance a programme can
contribute to its framework and infrastructural aspects, reducing overall costs that need to
be financed.

Commercial Financing

27
Commercial financing is available through institutions at both the national and
international levels. Commercial lenders are generally more reluctant to invest in
unfamiliar technologies in risky development circumstances than are Official
Development Assistance (ODA) sources. However, commercial sources control huge
financial resources, and if a solid business plan and predictable rate of return can be
presented, commercial sources can prove to be important funding sources

INTERNATIONAL CONCESSIONARY FINANCE

International concessionary finance (funding for development) falls into two broad
categories: official development assistance (ODA) and alternative international financing.
ODA is provided through the donations of developed countries and is earmarked
specifically for assisting less developed nations to improve their economies and standards
of living. Large international cooperatives like the United Nations (UN) and the World
Bank Group (WB) are major sources of ODA. In addition, most developed countries have
internal funds through which they provide their own development financing, called
bilateral aid.

PROVIDERS OF FINANCE TO THE POWER SECTOR IN INDIA

Financial Institutions

Financial institutions were established to provide medium-term and long-term financial

assistance to various industries for setting up new projects and for the expansion and
modernization of existing facilities. These institutions provide fund based and non-fund
based assistance to industry in the form of loans, underwriting, direct subscription to
shares, debentures and guarantees. The primary long-term lending institutions include
IDFC Limited, IIFC Limited, IFCI Limited, Industrial Investment Bank of India Limited
and Small Industries Development Bank of India.

28
State Level Financial Institutions

State financial corporation’s operate at the state level and form an integral part of the
institutional financing system. State financial corporations were set up to finance and
promote small and medium-sized enterprises. At the state level, there are also state
industrial development corporations, which provide finance primarily to medium-sized
and large-sized enterprises.

Public Sector Banks and other Public Sector Institutions

Public sector banks make up the largest category of banks in the Indian banking system.
The primary public sector banks operating in the power sector financing include the
Industrial Development Bank of India, State Bank of India, Punjab National Bank and the
Bank of Baroda. Other public sector entities such as the Life Insurance Corporation of
India also provide financing to the power sector.

Private Sector Banks

After the first phase of bank nationalization was completed in 1969 the majority of Indian
banks were public sector banks. Some of the existing private sector banks, which showed
signs of an eventual default, were merged with state owned banks. In July 1993, as part
of the banking reform process and as a measure to induce competition in the banking
sector, the Reserve Bank of India permitted entry by the private sector into the banking
system. This resulted in the introduction of nine private sector banks. These banks are
collectively known as the ‘‘new’’ private sector banks. These institutions also provide
fund based and non-fund based assistance to industry in the form of loans, underwriting,
direct subscription to shares, debentures and guarantees, and will compete in this sector.

International Development Financial Institutions

International development financial institutions are supportive of power sector reform

and of more generaKreditanstalt fur Wiederaufbau (KfW), the World Bank, the Asian
Development Bank and the International Finance Corporation.

29
In the early 1990s, the World Bank decided to finance mainly projects in states that
“demonstrate a commitment to implement a comprehensive reform of their power sector,
privatise distribution, and facilitate private participation in generation and environment
reforms”. Recent loans from the World Bank have gone to support the restructuring of
SEBs. In general, the loans are for rehabilitation and capacity increase of the transmission
and distribution systems, and for improvements in metering the power systems in states
that have agreed to reform their power sector.

The overall strategy of the Asian Development Bank (ADB) for the power sector is to
support restructuring, especially the promotion of competition and private sector
participation. Like the World Bank, the ADB also provides loans for restructuring the
power sector in the states and improving transmission and distribution.

Other Provisions for Power Sector Finance

There also exist several short term and long term financing measures by the GoI to
facilitate the financial viability of the power sector, such as the implementation of the
Electricity Act 2003. As a long term financing measure, the process has been initiated for
institutionalising mechanism for facilitating and accelerating private and foreign direct
investment into the power sector. l economic reforms aimed at mobilizing investment and
increasing energy efficiency. The primary international development financial institutions
involved in power sector lending in India include several international banking
institutions such as Japan Bank for International Cooperation,

30
BANKERS AND PEER GROUP

REC BANKERS
 Reserve Bank of India
 State Bank of India
 State Bank of Hyderabad
 Dena Bank
 Corporation Bank
 HDFC Bank
 ICICI Bank
 IDBI Bank
 Syndicate Bank

Rural Electrification Corporation Ltd.: Peer Group

 IFCI Ltd.
 Power Finance Corporation Ltd.
 Life Insurance Corporation
 IREDA
 Infrastructure Development Finance Company Ltd.
 SIDBI

INTERNATIONAL COOPERATION & DEVELOPMENT

 Japan Bank for international cooperation (JBIC)
 Kfw
 ADB
 World bank
 indo-german Bilateral cooperation Programme

31
In view of the growing need to diversify the resource base of the Corporation, a
dedicated IC&D Division headed by an Executive Director was set up in July 2004 to
coordinate with multilateral agencies for tying up project based funds on confessional
terms and to forge partnerships with international agencies for sharing international best
practices.

External Assistance of over Rs. 1100 Crore has already been tied up with JBIC & KfW
and negotiations are under way for securing additional lines of credit for EHV Projects of
Haryana and for HVDS projects of Haryana for further financial assistance.

32
REC BORROWINGS

2007-08 2006-07 2005-06 2004-05 2003-04

BORROWINGS (Rs. In lacs)
From govt. of India 8192 10048 11997 14017 118336
By issue of bonds 2408962 2248372 1675724 1360591 1197511
From LIC 350000 350000 350000 350000 150000
Foreign currency borrowings 104845 87209 - - -
Other banks 556230 332471 366200 213200 44000
Reserves & surplus (Net) 450904 323211 341773 299830 248377

Borrowings From govt. of India

140000
BORROWINGS(Rs. In lacs)

120000
100000
80000
From govt. of India
60000
40000
20000
0
2007-08 2006-07 2005-06 2004-05 2003-04
Years

33
 By issue of bonds

3000000
2500000
2000000
Amount

1500000 By issue of bonds

1000000
500000
0
2007- 2006- 2005- 2004- 2003-
08 07 06 05 04
years

From LIC

400000
350000
300000
250000
Amount

200000 From LIC

150000
100000
50000
0
2007-08 2006-07 2005-06 2004-05 2003-04
Years

34
 From Foreign Currency Borrowings

120000
100000
80000
Amount

Foreign currency
60000
borrowings
40000
20000
0
2007-08 2006-07 2005-06 2004-05 2003-04
Years

External Commercial Borrowings

The Company has entered into an ODA loan agreement with the KfW, Germany in the
financial year 2006-07 for Euro 70 million at a fixed rate of 3.73% for the purpose of
conversion of LT lines to High Voltage Distribution lines Project to be implemented by
State Discoms. Tenor of the loan is 12 years including grace period of 3 years. Euro
7,585,496.76 has been drawn till 31.3.2008 against this facility. The Company has also
entered into an ODA loan agreement with JBIC, Japan in the financial year 2006-07 for
JPY 20.63 billion at a fixed rate of 0.75% per annum to improve the sub-transmission
system, to reduce T&D losses and to expand the access to electricity for un-electrified
household and other rural loads. Tenor of the loan is 15 years with moratorium of 5 years.
JPY 3,251,751,977.77 has been drawn till 31.3.2008 against this facility.

35
AVERAGE COST OF BORROWING

Financial Borrowing Avg. Cost ofOutstanding Avg. Cost of

Year during theBorrowing Borrowing as onBorrowing on
year during the year 31st March outstanding
(Rs. in cr.) (Rs. in cr.)
2003-04 3988 5.69% 14660 8.34%
2004-05 8501 6.41% 18715 6.33%
2005-06 9063 6.78% 23389 6.59%
2006-07 9438 5.97% 29884 6.57%
2007-08 8366 7.54% 34272 6.57%
2008-09 15395 9.30% 44873 7.70%

Achievements of REC

36
 • Accorded hightest safety ratings by CRISIL, FITCH and CARE.

• Figures amongst the "Top 10 PSUs in the country"

• Consistently rated as 'Excellent'- the highest category - by Govt. of India since

1993-94.

• Received 'MOU' Award from the Government of India four times, for 'Excellence
in performance'

• Cumulative sanctions & disbursements stand at Rs. 80,000 crore & 45,000 crore
respectively.

• Plans to undertake rural electrification programmes in other countries.

• Investor’s base increased by 90 thousand to 2 lakhs.

• Aspires to be a Rs. 50,000 crores company by the year 2012.

SWOT Analysis

37
STRENGTHS:-
• Company has in depth knowledge and extensive experience in power sector.
• Company has shown strong financial performance –return to net worth ,net intrest
margin,lowest cost of borrowings etc.
• Strong ground level relationship with utiliities and generators
• Company has good credit ratings which is equivlanets to soverign ratings
• Strategic positions in governments growth plans for power sector

Weakness:-
• Company is heavly depends on governments plans and funding
• Iregular ratio of net NPA to Net Advances
• Managements of funds totally depends on government annual plans and functions
• Profit margins hurts badly when some intrest rate subisdy provided by
government

OPPORTUNITIES

38
 • Company is growing with fast pace since its inception so in long run it has
build up a good image.
• Due to its good image company can raise more needed money from public
sources.
• Government can dilute more funds through issuing FPO or qualified
institutional placements.

Threats
• Since company put more emphasis on rural sector and rural sector totally
depends on the climatic conditions which is quite uncertain in India.
• NPA’s of the company is expected to rise in because of plung donwn of
the global demand of the commodities.

Conclusion:-

39
Rural Electrification Corporation which has recently in past few years got NAvratna
Status is growing with the fast pace.The company is performing well in its borrowing
since it is able to maintain lowest cost of borrowings and in turn disbursment ii is able to
get good return since some part of is subsidised by government
REC plays a pivotal role in the process of accelerated development of power
infrastructure in rural areas. The loans extended by REC to various SEBs/ Power
Departments are generally backed by the respective state government guarantees. As on
March 31, 2006 (prov), the total loan assets of REC registered a rise of almost 20% over
previous year. Electrification schemes currently being financed by REC encompass
electrification of villages (village electrification), intensive load development in
electrified villages (intensive electrification), electrification of dalit bastis and hamlets,
pump-set energising, improvement of T&D infrastructure (system improvement), short-
term loans to SEBs (working capital) etc. The corporation also has the mandate to
implement the Rajiv Gandhi Gramin Viduytikiran Yojna (RGGVY) under which the
REC would lend directly to state governments. Along with the existing electrification
schemes REC has mandate to channel funds for Accelerated Generation & Supply
Programme (AG&SP) and Accelerated Power Development & Reform Programme
(APDRP) schemesof GoI. This establishes the likelihood of GoI support to REC given its
participation in these activities as well. REC's role has been expanded to fund all schemes
and projects related to power sector including large generation projects. This has
increased the gamut of operations for REC considerably. The changing business mix
would help to create a positive business environment for REC to face market
competition. However, lending in this segment will expose REC to direct competition
from other Financial Institutions/ Banks who are well entrenched in this segment. During
FY'06 (prov), REC registered a growth in loan sanctions of almost 15% y-o-y basis.

Disbursements during FY'06 were around Rs 8000 crore, showing a marginal y-o-y
growth of 1.5% in FY'06. The disbursements were primarily towards T & D projects and
short-term loans.

40
Loan assets of REC mainly comprise loans extended to SEBs. Considering the weak
credit profile of SEBs, REC's assets are inherently of weak credit quality and are exposed
to risk of non-payment of dues. Majority of these loan assets are backed by respective
state government guarantees and are classified as 'standard' as per RBI guidelines despite
being overdue for over six months, till invocation of guarantee. However, REC for the
purpose of income recognition, classifies accounts overdue for more than 180 days as
NPAs. Credit risk is, to an extent, addressed by credit enhancement measures such as,
letter of credits escrow mechanisms, state government guarantees etc. Under the recovery
initiatives, REC settled overdue to the tune of Rs 415 crore of Assam and Mizoram in
FY'06 thus bringing down the total overdue by over 100% compared to previous year.

41
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2. http://www.business-standard.com/india/storypage.php?tp=on&autono=33438
3. "Kalam to attend Jatropha planters’ convention". India eNews Pvt. Ltd.
http://indiaenews.com/2006-06/10698-kalam-attend-jatropha-planters-
convention.htm. Retrieved 2006-07-08.
4. "Tapping the Wind - India". February 2005. http://www.tve.org/ho/doc.cfm?
aid=1678&lang=English. Retrieved 2006-10-28.
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http://knowledge.allianz.com/en/globalissues/safety_security/energy_security/ene
rgy_security_oil_electricity_gas_coal_india.html. Retrieved 2008-07-03.
6. Renewing India - Under Heading:Solar Photovoltaics

• www.google.co.in

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• www.recindia.nic.in

• Annual Report of REC

42