State-run lenders to Power Finance Corporation and Rural Electrification Corporation are set to provide a boost of over Rs 1 lakh crore to the renewable energy sector as the two companies are looking to offer cheaper finance to low-risk commissioned renewable energy firms to help them replace costlier loans.

The move is aimed at utilising the cash that the two financiers will receive in lieu of loans lent to state-run power distribution companies. Shares of REC and PFC had taken a beating a day after the government announced the debt recast scheme Ujjawal Discom Assurance Yojana (UDAY) on November 5 for distribution companies as it is likely to hit the interest income of these companies.

At present, renewable energy projects constitute nearly 10 per cent of the loan portfolio of REC and PFC. The lack of new conventional coal and gas projects by private companies has also prompted the two companies to shift focus to renewable sector.

Under UDAY, the two companies will recover their debt exposure to state distribution companies in cash. PFC and REC have an exposure of over $20 billion to these companies.

The non-banking finance companies plan to utilise the cash to finance energy projects, mainly green energy plants such as solar, wind and biomass power plants, a senior government official said.

"REC and PFC are looking at various options to utilise the cash. They will look at bigger role in renewable energy sector," said the official, who did not wish to be named.

While other state-run banks with exposure to debt owned by distribution companies will be issued bonds backed with sovereign guarantee at 8-8.5 per cent yield, REC and PFC will receive cash in lieu of their loans. The decision was taken to protect the balance sheets of the two financiers that borrow at less than 8 per cent, he said.

The companies are, however, not likely to pick equity stakes in power projects and are likely to identify only commissioned power plants that are low on risk .

A senior REC official said the company had at its board meeting in the last week of December okayed refinancing and takeout financing of large renewable projects. Under take-out financing, the company will completely replace the lenders of a power project, while under refinancing scheme REC will offer loans to projects to help them retire 25-50 per centof their debt.

The government official said PFC also plans to implement similar schemes to utilise its cash.

"In a scenario that most states accept this package, we believe PFC-REC's loan book will shrink over the next one-two years, as SEBs (state electricity boards) repay short-term/transitional finance loans," Kotak Institutional equities said in a note.

ICRA Research said the extent of credit of PFC and REC which could eligible under this programme is estimated at 11-14 per cent of their combined credit, thereby reducing their portfolio vulnerability