Restructuring should not be considered anathema

Although banking sector stress may have ‘bottomed out’, as he puts it, India’s infrastructure sector remains vulnerable to risks, both inherent and external. Corporate restructuring should not be thrown out the window as a solution for problems that are extraneous to a project, says M Bhagavantha Rao, Managing Director, State Bank of Hyderabad, in an interview with Sumantra Das.

The usage of the term "policy paralysis", as applied to our government, has reduced, and sentiments seem to indicate excitement. Do you believe we are going ahead of time or behind?
Recently, Government of India has taken the following policy initiatives for generating growth over the next 3-5 years which will negate any such presumption [of "policy paralysis"]:

• Allowing FDI in multi-brand retail.
• Exempting linear projects such as roads, transmission lines and gas pipelines from seeking consent of gram sabhas under the Forests Rights Act.
• Setting up of National Investment Board (NIB) under the chairmanship of the Prime Minister to expedite clearances for major infrastructure projects.
• Reduction in withholding tax on interest income from 20 per cent to 5 per cent for loan agreements and long term infrastructure bonds in foreign currency.
• Raising corporate bond limit for foreign institutional investors (FIIs) to $45 billion from $20 billion.
• Setting up of Dedicated Railway Freight Corridors and Delhi-Mumbai Industrial Corridor.

Are we lacking somewhere on long term vision? What has been your experience?
Our country has diverse socio-economic-political compulsions. While long term vision is envisaged in various fora as well as in the Five Year Plans, sometimes there arises a need to make some strategic corrections at certain stages. The momentous leap in the telecom sector would not have happened without a long term vision. Similarly, the vast strides made in the roads, ports and power sector would not have become possible. Having said that we have a long way to go to achieve what has been planned.

How far global economic scenario affected Indian infrastructure sector (finance part)?
Eurozone debt crisis has affected accessing external resources by way of external commercial borrowings (ECBs) and this has accentuated the funding gap.

How will you describe Corporate Debt Restructuring (CDR), as it seems as norm for most of the infra companies in India?
Corporate Debt Restructuring should not be anathema. Projects with huge investments getting stuck for extraneous reasons should not be killed and assets junked. Commissioning of infrastructure projects is a lot more complex than envisaged. Right of Way (problems related to land acquisition) in respect of road projects, delayed clearances by various agencies more particularly with regard to environment and forest and linkages (coal, power, water etc) lead to time and cost overruns necessitating restructuring at a subsequent stage.

What is the single biggest post-investment risk that banks face in India with special reference to infrastructure?
Problems relating to Right of Way (land acquisitions) and environmental and forest clearances after financial closure have become very serious issues to promoters as well as lenders post investment.

In your opinion, has PPP in infra sector been as successful as you had envisaged? If not, what are the other options infra companies should look out for?
As of now, public, private partnership (PPP) is considered to be the better option available for infrastructure development. More that 700 PPP projects are currently being carried out across the country. The failure at any stage, however, is more on account of bottlenecks plaguing infrastructure projects as a whole rather than efficacy of the model.

International rating agencies have downgraded Indian banks recently and foreign investors look at India as a risky proposition. In your opinion, does this nation have enough experience in infrastructure to be called low risk?
Threat of downgrading of banks has assumed global dimension in the face of general recessionary trend engulfing all the nations which in turn has increased stress level on the assets of the banks. As mentioned earlier, infrastructure development involves long gestation periods, apart from various legal and procedural issues. The added uncertainty due to these factors is affecting the risk appetite of investors.

Infra projects in developing countries like India are perceived as highly vulnerable to various risks which constrains financing. However, various policy initiatives now taken by the government will help in mitigating certain risks and provide some reassurance to investors.

What has been your experience in lending to infrastructure sector? What is the current exposure of your bank to the power sector?
Going by the historical data, our experience in lending to infrastructure sector is mixed particularly in view of visible stress on the assets financed. But in terms of impaired assets, the position is not a cause for immediate concern. Out of current exposure of Rs 12,067.28 crore to infrastructure sector as on 31 December 2012, non-performing asset (NPA) is only 1.65 per cent. Among the infrastructure sectors, power is comparatively better than others. Out of current exposure of Rs 5,192.61 crore to power sector as on 31 December 2012, NPA is only 0.59 per cent.

What are your plans for lending to infrastructure this fiscal? Which are the infra verticals do you see more prospects?
The government is increasing focus on infrastructure supported by private sector participation. The investment has increased from 5.7 per cent of GDP in the base year 2006-07 of 11th Plan to around 8 per cent during 2011-12 (Table 2) and 12th Plan envisages further increase in infrastructure investments from 8 per cent of GDP in 2011-12 (base year of 12th Plan) to 10 per cent of GDP in 2016-17. Our plans to fund infrastructure sector will be in line with the national objective. We see more prospects in roads/power sector.

Are there any plans for you to finance power sector, especially to SEBs in the near future?
As far as financing to State Electricity Boards (SEBs) is concerned, we have dominant presence in Andhra Pradesh, which is our traditional area, and some presence in Karnataka and Tamil Nadu. We are not averse to funding power sector, especially to SEBs in our traditional area. We may redefine our approach in this sector based on the success of the latest policy of Government of India on restructuring the SEBs.

What are the biggest changes you see among infrastructure investors?
In a federal county like India, participation and support of state governments is essential for developing infrastructure. States with investor-friendly land acquisition policies and support with regard to maintaining law and order, shifting of utilities, rehabilitation and settlement of displaced persons etc, are attracting more investments.

There is a general feeling that we have not seen the worst yet. What is your view and how deep is the stress?
In my view, the stress as far as the banking sector is concerned, has bottomed out. There are positive signs of recovery, which coupled with recent policy measures announced by the government, would augur well for both the economy in general and banking sector in particular.

As a lender would you like to be more involved in the infra projects than you are at the moment?
We have come of age in infrastructure funding with an experience of over two decades. Since infrastructure projects involve huge financing requirement, it is important to make the project commercially viable to ensure regular servicing of the loan. This will lead to sustainable development of infrastructure without jeopardising the soundness of financial sector.