Domino effects of stuck cash

NPAs are at best symptomatic of a deeper problem among infrastructure projects-ùin particular, among those on public-private partnership (PPP).

As some public banks are hinting at going dead-slow on lending to infrastructure, the slowdown cycle may have come a full circle.

Experts and banking practitioners have feared the cascading effects of cash flow blues that the industries are faced with, and nowhere is it more evident than infrastructure’s struggle with dues recovery. In March, Finance Minister P Chidambaram had urged banks to focus on recovery-ùthe impending threat of cash flow crunch was clear and present. Talking tough, the finance minister had then reasoned that while restructuring of loans and non-performing assets (NPAs) have increased, efforts towards recovery must be redoub-¡led. That made sense so that there would be a cancelling effect’at least partly. Ominously, he had said that there ‘cannot be an affluent promoter with a sick company’. If anything, NPAs have only increased meanwhile. The 40 listed Indian banks reported NPAs worth Rs 2.08 trillion in June 2013, up from Rs 1.49 trillion in June 2012, an alarming 40 per cent increase. Infrastructure forms nearly 10 per cent of these sick loans, and allied industries such as steel and construction constitute a whopping 30 per cent. Banks have consistently told Infrastructure Today in the past three months that restructured accounts especially in the struggling power distribution segment have been behaving them-¡selves as far as cleaning up books.

A domino effect, involving raw material availability issues, project clearance delays, disputes and finance-¡ability issues, has brewed up the current crunch in cash availability to banks as well as to vendors of infra-¡structure-related supply, such as power equipment. In the first half of September, Bharat Heavy Electricals (BHEL) CMD BP Rao shot out legal notices to four power companies, including three Abhijeet Infrastructure, Adhunik Thermal and Visa Power named in the Comptroller and Auditor General (CAG) report on dubious coal allocation. BHEL is claiming a steep Rs 17,000 crore in overdues.

Central Industrial Security Force (CISF) has an overdue amount of Rs 16 crore pending from Delhi Airport Metro Express (DAMEPL), a Reliance Infrastructure (RInfra) subsidiary that managed the line before it pulled out. In turn, RInfra itself is anxious to recover Rs 5,550 crore of cross-subsidy surcharge from Mumbai’s power consumers. The good news for the company is that the Maharashtra Electricity Regulatory Commission (MERC) has allowed it to do so. We will track it to see how it results-ùor does not resultin further recoveries by CISF.

The defaulters have their own tale of woes to tell, typically blaming the economy or inter-company mis-¡understanding. But much of non-recovery is also because of the long construction of infrastructure projects, exacerbated by external and internal factors like tardy clearances and land acquisition, and disputes between project partners. More infrastructure players have been realising that they had overestimated the revenue estimates, especially in terms of when they will start flowing in. The biggest infra players like GMR, Jaypee, GVK, HCC and even the ever-aggressive L&T have borrowings worth Rs 2.2 lakh crore, but observers now suspect that most of them have used amounts meant for capital expenditure for working capital and cash losses.

Results are already concerning: BHEL has already closed a project site (Visa Power) while it has ‘demobilised’ another large power plant in Jharkhand belonging to Abhijeet Group. CISF announced mid-September that they would need to sell or auction equipment such as baggage scanners and metal detectors on which the dues are pending. But these will be ad hoc measures. The real test is with BOT and similarly modelled projects, where developers are still testing the waters.

The chilling realisation that while bidding for these projects, developers may have overstated the revenue dates is dawning upon banks.

Meanwhile, infrastructure’s less obvious but integral participants such as HUDCO are expressing their intent to finance restructured projects, including, for example, state discoms. About 72 per cent of the bank’s lending is to infrastructure, but with an astonishingly low NPA of about 1 per cent in comparison to as high a figure as 5-6 per cent in some of the risk-exposed banks such as Central Bank of India and Punjab National Bank.

Significantly, though, HUDCO would like to keep their lending sovereign lending to government agencies alone.
Shashidhar Nanjundaiah