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A Project Report On “Resource Mobilization” RURAL ELECTRIFICATION CORPORATIONSubmitted by Ghanshyam saraf MBA
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A

Project Report

On

“Resource Mobilization”

RURAL ELECTRIFICATION

CORPORATION”

Submitted by

Ghanshyam saraf

MBA

POORNIMA COLLEGE OF ENGINEERING

Department of Management Studies

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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

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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

Preface3

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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

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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.

INTRODUCTION5

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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

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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

Agency

Rating Assigned Remarks

CARE Long Term

Borrowing

“CARE AAA”

Short Term

Borrowing

“PR1+”

Instruments with this rating are considered to be of the

best credit quality, offering highest safety for timely

servicing of debt obligation

Instruments with this rating have strong capacity for

timely payment of short term debt obligations and carry

lowest credit risk.

FITCH Long Term

Borrowing

“AAA (ind)”

Short Term

Borrowing

“F1+”

Highest rating for Long Term borrowings.

Highest rating for Short Term borrowings.

ICRA Long Term

Borrowing

“LAAA”

Short Term

Borrowing

“A1+”

Highest credit quality rating for Long Term borrowings.

Carries lowest credit risk.

Highest credit quality rating for Short Term borrowings.

CRISIL Long Term

Borrowing

“AAA/Stable”

Short Term

Borrowing

“P1+”

Indicates highest degree of safety for timely payment of

interest & principal.

Highest rating for Short Term borrowings.

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Credit Rating of REC-International

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.

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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.

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)

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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

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.

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The following graph presents the gap between requirement and supply of electricity in India from

fiscal 1999 to 2006:

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

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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.

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.

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Rural

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

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CATEGORY PURPOSE

Project Household Electrification P:RHhEAccelerated Electrification of one Lakh villages

and one crore households

Project Village Electrification: P:VE (SG)Aims at Electrification of unelectrified villages

in a selected designated area

Project Dalit Basti: P:DB(SG)

Aims at Electrification of unelectrified tribal

/dalit bastis by release of Household, Street

Light and other connections

Project Hamlet Electrification: P:HE(SG)

Aims at Electrification of unelectrified hamlets

by release of Household, Street Light and other

connections

Project Village Electrification: P:VE

Aims at electrification of new villages

including electrification of left out hamlets in a

selected designated area

Project Intensive Electrification: P:IE

To cover intensive load development for

providing connections to rural consumers in

already electrified areas

Project Dalit Basti: P:DB

To cover electrification of dalit bastis located in

the electrified areas by release of house hold

and street light connections

Project Hamlet Electrification: P:HE

To cover electrification of hamlets located in

the electrified areas by release of house hold

and street light connections

Project Pumpsets: SPA:PE Aims at energisation of pumpsets

Project system Improvement: P:SI

To strengthen and improve the transmission,

sub transmission and distribution system in the

designated area

Project Comprehensive System Improvement:

P:CSI

To meet system inadequacy of entire system

from LT Distribution to Sub transmission and

transmission level of a given geographical area

SI:Meters, Transformers, Conductors,

capacitors etc.

For procurement and installation of meters,

transformers and capacitors etc.

Short Term LoanTo provide finance to the Power Utilities and

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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.

Debt Refinancing

The Scheme aims to facilitate reduction of the

cost of borrowings of State Power

Utilities/highly rated private power utilities by

repaying their high cost term loans raised from

other Banks/Financial Institutions for eligible

projects/schemes.

Financing Equipment manufacturers

To provide Short term Loan/Medium term loan

to the manufacturers of Power/Electrical

material for power project.

RE CooperativesDevelopment of rural electric cooperative

societies

GenerationCovers all types of schemes irrespective of

nature, size and source of generation.

Financing

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"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

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.

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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.

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

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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.

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

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States with 80% or more households yet to be

electrified State

Percentage Number of Households

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

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AVAILABLE FINANCING: OVERVIEW OF SOURCES

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

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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.

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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.

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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,

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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

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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. 

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REC BORROWINGS

BORROWINGS (Rs. In lacs)2007-08 2006-07 2005-06 2004-05 2003-04

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

0

20000

40000

60000

80000

100000

120000

140000

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

Years

BO

RR

OW

ING

S(R

s. I

n l

acs)

From govt. of India

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By issue of bonds

0

500000

1000000

1500000

2000000

2500000

3000000

2007-08

2006-07

2005-06

2004-05

2003-04

years

Am

ou

nt

By issue of bonds

From LIC

050000

100000150000200000250000300000350000400000

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

Years

Am

ou

nt

From LIC

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From Foreign Currency Borrowings

0

20000

40000

60000

80000

100000

120000

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

Years

Am

ou

nt

Foreign currencyborrowings

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.

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AVERAGE COST OF BORROWING

Financial

Year

Borrowing

during the

year

(Rs. in cr.)

Avg. Cost of

Borrowing

during the year

Outstanding

Borrowing as on

31st March

(Rs. in cr.)

Avg. Cost of

Borrowing on

outstanding

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

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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

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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

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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:-

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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.

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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.

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Bibliography & References

1. http://www.business-standard.com/india/storypage.php?tp=on&autono=445622. 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.

5. . "Energy Security India, Allianz Knowledge". 2008-05-27. http://knowledge.allianz.com/en/globalissues/safety_security/energy_security/energy_security_oil_electricity_gas_coal_india.html. Retrieved 2008-07-03.

6. Renewing India - Under Heading:Solar Photovoltaics

www.google.co.in

www.rbi.gov.in

www.wikipedia.com

www.finmin.nic.in

www.recindia.nic.in

Annual Report of REC

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