Even as America frets that Chinese FDI into the beleaguered economy will buy up America, India is welcoming Chinese investments in the power sector, proposing to accept loans in RMB and increase the purchase of Chinese power equipment to boost India’s increasing appetite for energy, thereby also aiding the internationalisation of the yuan.

Inchin Closer has in the past followed the dual edged sword of power between India and China. The initial struggle for equipment Vs. Capacity and now as Chinese equipment seems like the only choice, financing of this equipment to power India. Large companies such as RCom and Reliance Power have been borrowing from Chinese banks for a while now, in June we wrote about 100 Indian companies FCCB’s maturing and having to most probably borrow from Chinese banks. As India’s power consumption rises, it will have to frame proper policies, for importing equipment from the worlds largest energy consumer.

According to the Times of India, New Delhi is likely to bring on the table a proposal to allow funding of power projects in Remnibi (RMB), as a way to energize overseas fund flows into the sector during the 12th Plan beginning next year. Latest government documents being prepared for 12th Plan strategy discussion reckon the power sector would need about Rs 14 lakh crore during the 2012-17 Plan period to meet the proposed capacity addition target of 1,000 mw. Nearly half of the funds would be required for core activities of generation, transmission and distribution.

However, due to lending caps on banks and infrastructure development companies, Indian power companies have already utilized half of the sectoral cap available. With an estimated debt financing requirement of almost Rs 10 lakh crore, several banks are likely to hit their sectoral caps, leaving many projects to grapple with financial closure.  There is at present a 15 percent exposure limit on a particular sector. Lenders cannot also lend more than 15 percent of capital funds to a single borrower and 40 percent of such funds to a group of companies.

In order to stay afloat, Chinese power equipment companies are offering Indian power companies such as Reliance ADAG, Lanco and GVK the option to borrow funds from Chinese banks. But this comes with a cevat, Indian companies need to place large orders with Chinese firms and a part of the loans to Indian promoters will be availed in RMB.