Banks with an exposure of 32 per cent are a major funding source for the infrastructure sector, and private players should not write off their contribution. VG Kannan, Managing Director and CEO, SBI Capital Markets Ltd, in an interview with Rahul Kamat says that banks are still willing to fund projects, but this will depend on the viability of the project itself.
Bad planning always causes project delays. But the reality seems to be different as we see just one side of the coin. What is the other side of the coin? Bad planning should not be the right word. In fact, I would rather say that the delays in projects is due to a combination of issues which have to be handled beyond the control of the promoter in many cases. In some cases, we have witnessed over-ambitious bidding, which has drawn more criticism than procedural delays. Considering a public-private partnership (PPP) project clearance, from a PPP appraisal committee in the ministry, it goes to the cabinet committee for investments and then the projects are actually taken up by the promoters. In this exercise, there are various levels at which a project gets delayed.
We require more coordination than cooperation. That's because many of these stuck projects need support in infrastructure in order for them to become viable or they need coordination with various agencies for them to come through on time. Any large industrial project requires land. Access to contiguous pieces of land in desired locations has been an issue. Connectivity projects such as roads and railways are most profoundly impacted by delays in land acquisition, mainly due to the involvement of multiple agencies for acquiring clearances. The matter is further complicated if the projects are spread across various states. Delays in receiving clearances, even for valid reasons, make redundant the underlying assumptions made in financing the project and consequently increase the level of uncertainty and risk in project viability. Right now, in India, infrastructure is a necessity. In my opinion, the regulatory and government agencies must further amend the concession agreements to address unforeseen situations which are beyond the control of the contractor, that too, in a time-bound and equitable manner, so that the project funding remains bankable for most of the time.
Infrastructure players complain that banks do not want to burn their hands funding infrastructure projects. Your comment... You should ask them who has funded their projects earlier. It is still a mystery to me. On what basis do they allege (the same). First of all, where are the new projects? It is the banks who have funded the maximum number of projects in the last three years, despite having a sector-wise limit. It is a question of viability of the project and capability of the infrastructure player who is going to execute it. The amount of funding that the banking sector has put in infrastructure is as high as 31-32 per cent. So funding is not a constraint. There is no doubt that a lot of funding has gone into the infrastructure sector. Even today banks are more than willing to lend to projects. However, it will depend on the project itself and people who are executing the project. If a developer has the skills for executing the project and the project itself is feasible, there is no reason banks will not fund. We have been successful in syndicating projects in sectors like power and steel. If the project has been found bankable, we have been able to successfully place it in the market. Of late, certain sectors like power generation are taking longer than usual on account of limitations in funds due to sector exposure from commercial banks which have been the largest source of funds for the infrastructure sector.
You have questioned the announcement of new projects, but the government has cleared projects worth Rs 4.5 lakh crore... But that was in the past six months. And, when these projects will come in the financial market, it will take minimum three years because before funding these projects, a lot of unfinished ground level activities have to be accomplished. In fact, now there is a growing trend where private players prefer to have all project related clearances in place first place before going ahead for the financial closure. So probably, the second half of FY16 will witness a funding boom. The recent announcement of resumption of mining in Goa and similar steps would be positive for new projects to come up.
The road sector was a major gainer, but with overpricing and aggressive bidding, it turned out to be a non-secured portfolio... Absolutely, it was a major gainer as most of the banks preferred to fund roads and power projects than any other sector. This is where we as the banks have taken a hit. In the road sector, on account of tweaking of terms itself it can be treated as an insecure assets. Besides, the concessions in respect of road projects are now being given for 30 years. Now, when that happens, the bidding becomes aggressive. If it is bid out aggressively, the entire project may become unviable because the amount that is given to these infrastructure projects by banks has to be paid back in 10-12 years. But in the first few years, cash flows are low and so there is a stress. If we could actually allow a repayment period of 20 years then stress would not show up.
Banks have an Asset Liability Mismatch (ALM) problem, as their deposits are of a maximum tenor of 10 years. So banks cannot give a repayment period that exceeds 10 years as banks do not have a well-developed secondary market or a well-established method of take-out financing. Therefore, banks have to put repayment upfront and when a developer aggressively bids on a project, the viability of the project itself is questioned. However, these matters have all been flagged to the respective authorities, ministries and departments.
So, to that extent, I am sure something will be worked out subsequently.
Does that mean banks have learned lessons from their past experience? To some extent, yes. I agree that banks are now keeping their hands off from the infrastructure sector because of past experience. In some cases, the strategies of banks must have gone wrong, but one should not put the blame on the banks in a point blank range. Even now, there are many infrastructure projects, mainly in the power sector that have received funds from banks but those are financially viable. So, banks with their hands full, are learning from their past experience. However, they are still supporting infrastructure projects which are viable and have all clearances in place.
But are banks ready to finance new projects? Yes, but promoters should have good projects and capability. Developers should declare their revenue model from where the capital and liquidity will come.
If all these three things are in place, then I don't think funding new projects would be a problem for us. After all, banks also need to lend in order to make money. Banks are in business and will continue to do business as long as good people are coming with good projects.
Is IDF the best bet in the present scenario? Certainly. It is necessary in the present scenario where the funding requirement for the infrastructure sector is not available and other possible options are unutilised. In such circumstances, IDF stands as an alternative. IDF is required because ALM issues affect the banks and banks cannot allow the kind of period required for proper smooth repayment of infrastructure projects. Therefore, IDF may not only be able to take out these finances from banks, but also thereby create a win-win situation for everybody. Banks will again have resources to lend to new projects as exposure would be reduced. Secondly, promoters will be able to access longer tenure funds at lower rates. For IDF, they will be able to attract those investors who are presently having long term fund such as insurance, pension sectors and all such sectors will be able to pool in. So for the investors, borrowers, banks and for every single stakeholder in the business, this is required and we will have to do something in order to promote this.
The concept of take-out finance is yet to take-off... Although the concept is good, take-out finance has some issues to deal with. While some projects do become available for take-out financing, usually such projects being in the bankable category, the principal lenders are hesitant to reduce their stake as there is a perception of inadequate return for the key risk already being assumed by the incumbent lender(s). With more modifications in the schemes and capitalisation of banks, we can expect some immediate relief. However, in the long run, we need to have access to longer tenor and low cost funds to make the project financing attractive. Therefore, fee sharing mechanisms need to be improved. Also, if the reduction in interest rate is high then it will prompt the borrower to facilitate the takeout scheme.
How do you assess State Electricity Board (SEB) restructuring? Will it be able to bring in actual reform in the sector? We have always found that the country does very well when it is pushed to a corner. If restructuring goes through and the credit profile improves them immediately, the whole power scenario will look better. Having said that, it is also dependent on the performance of the SEBs that how much they can actually increase tariffs, realise tariffs and reduce losses. Reduction of losses is very important. There is a huge distribution loss that needs to be recognised and stopped. Unless we stop that you will not be able to bring back health to the sector. The government is taking absolutely the right steps and all players down the line whether Central or State, they are all on board because we have seen the amount of tariff hikes and steps for improved recovery that has taken place across the board in all States.
How will it benefit the banking sector? Issue of bonds will ensure that loans are moved from the loan book to the investment book. On account of the fact that there will be State and Central governments guaranteeing and getting into it, banks will be better off. At a later stage, if we ensure that some kind of depth comes into the market, then we can see whether banks can get it off the books also by sale to long term investors and release space for further funding of the power sector. Some banks are almost full of their exposure levels to this sector and unless they can get some of the exposure off their books, they will not be able to take fresh exposure.
Restructuring of loans, especially CDR, is a regular affair in India these days. Will this help projects? CDR has played a worthy role for both the borrowers and banks in times of crisis and economic downturn. For banks, CDR is just a temporary sacrifice. And I do not think that corporates can take undue advantage of CDR. Repayment has to happen out of cash flow of those assets. Cash flow of the assets in initial stages might not be as much as it is projected. For instance, in a road project, the traffic takes time to build up. The cash flows become better towards the later end rather than towards the front end and as a result, there is a lot of stress in the front end. Many of these things have to be restructured so as to ensure that payments get a longer tenure to be fulfilled. Those who have raised finance in 2007-08 are not in stress because of the availability of equity funding, which is not there in the market now. In fact, though it is available, it is not at the right price.
Do you think that CDR needs a revamp? Yes, it does, but it also depends on the present macro and micro conditions. These could include realignment of the legal system with remedies available for the creditor as well as phasing out of curbs on asset classification and provisioning as it encourages the banks to only restructure viable accounts. In most of these projects, the asset is good and it is going to definitely have cash flows but they may not happen at the rate at which you have predicted. The promoters who stand by these projects also give their personal guarantees and pledge of shares which indicates their commitment to the success of the CDR. Therefore, there is a need to extend the tenure to ensure that the cost overrun can also be repaid and the lack of cash flows coming in the initial phases can also be built up.
Over a period, you have to understand that restructuring is only done where viability is not a question. It is not done where we feel that the project itself is not viable but only when you are sure that viability exists given a longer tenure that this repayment will definitely come through.
What is the single most important post-investment risk that bankers face? I think it is the implementation issue. If a project gets successfully implemented on schedule, banks also get their due credit in terms of repayment. You have to do some focussing on the projections for the long gestation infrastructure projects in order to understand what will be the demand and issues facing such projects. Moreover, the government needs to have all the clearances made available at one place so that a project implementor will save time on running from pillar to post. If the government is unable to have a single-window clearance then at least let us have a fewer window clearances r a single nodal clearing agency in place than the plethora of clearances from various agencies.