Finance blues will change as macroeconomic conditions change: Experts

Our Experts

Aseem Dhru, CMD, HDFC Securities, a leading stock broking company with interest in infrastructure investments.
Mukund Sapre, Executive Director, IL&FS Transportation Networks, which has an MoU with East Nippon Expressway Company for implementation of highway projects jointly underPPP mode.
Sanjay Sinha, Founder, Citrus Advisors, which provides expertise in financial and fund management. Views are personal

Why have financial institutions hard-braked on their infrastructure lending?
Dhru
Lending to the infrastructure sector expanded at a decent pace of 37 per cent CAGR during FY03-13. Lending to infrastructure sector as a part of overall industrial bank credit rose to 32.7 per cent of in FY13 from 10.6 per cent of FY03. Over the past five years, lending to power sector grew by a faster clip of 34 per cent CAGR.

Unavailability of fuel supply and dire straits of State Electricity Boards (SEBs) have led to severe strains of ability of borrowers to service these debts.

Moderate economic activities for an extended period of time pose immense pressure on banks and NBFCs for bad loans emerging from whole host of sectors. The caution comes against the backdrop of heavy restructuring already seen in the infrastructure portfolio.

For the banking industry as a whole, the gross NPAs and restructured standard advances for the infrastructure sector, together as per cent of total advances to the sector, increased considerably from Rs 12,190 crore (4.66 per cent) as at the end of March 2009 to Rs 136,970 crore (17.43 per cent) as at the end of March 2013. Out of this, the power sector had the highest at 19.40 per cent in FY13 up from 4.54 per cent in FY09, while for the telecom sector this rose from 1.76 per cent in FY09 to 15.64 per cent in FY13.

Infrastructure projects are being delayed due to other issues like land acquisition, environmental clearances leading to significant cost overruns. Given the current scenario of relatively high interest rates and systemic issues in power, telecom and road sectors, the growth momentum will remain low-key in FY14.

Sapre
The institutions that could provide long term lending to projects haven’t yet developed enough or are too small in size to shoulder the ever-growing requirement for debt funding to infrastructure projects. To add to the already precarious situation, there was uncertainty on the policy side (especially on the power side with regard to fuel linkages and PPAs) and aggressive bidding by a few developers, increasing the risks on such projects.

However, given the low credit growth, banks are still funding the projects, albeit with more caution. Developers with good track record and viable projects have many takers.

What are the factors because of which both domestic and international investors have become extra-cautious in investing in India’s projects?
Sapre
The slowdown is mainly on account of two factors: Firstly, the high interest rate regime adopted by the RBI, coupled with tightening of liquidity and steep depreciation of the rupee, has hurt all the infrastructure projects. Infrastructure projects, by definition, are highly leveraged and increase in cost of debt could reduce the RoI significantly. Some project costs went up because of high import components and because the contracts don’t provide protection against depreciation in rupee. Secondly, the policy inaction at the infrastructure level has also put off investor interest. The largest two sectors within infrastructureùpower and roadsùare both hit by slowdown. The power sector is plagued by fuel linkage issues wherein many power plants are lying idle and the ones under construction are going slow. Similarly, in the absence of improved SEB health, the merchant power tariff is also not helping IPPs not supported by PPAs. In the road sector, more than 30 projects earlier awarded have not started on ground.

Dhru
The recent released 2013 Global Venture Capital Confidence Survey, shows a 7 per cent drop in the sentiment of US based private equity and venture capital (PE-VC) funds towards India as compared to 2012. The confidence of UK-based funds has fallen by a whopping 18 per cent compared with last year. The major worries behind it are current inflationary trend, instability and the depreciating rupee.

Domestically the trinity of the fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security bill which has put fears of downgrade from rating agencies in the minds of investors.

Sinha
We have seen access to capital and risk appetite dry up in the global markets. Certain governance issues that cropped up in some parts of the sector such as mining and telecom also made investors more cautious. To some extent the decision to impose retrospective tax may have also contributed.

What is the status of the much-hyped Infrastructure Development Funds (IDFs)? Has fund raising been a problem?
Sinha
The mobilisation is surely not impressive. It may partly be due to a lukewarm outlook on the sector today. This may change dramatically once the outlook improves.

Dhru
India Infradebt (a joint venture among ICICI Bank, Bank of Baroda, Citicorp Finance and Life Insurance Corporation of India) and IL&FS Infra Debt Fund (a joint venture between IL&FS and eight public sector banks including Bank of India and Allahabad Bank) are among those with triple A rating poised to raise funds.

According to experts, under the present format, debt provided by IDF-NBFCs will be senior to the existing project debt, and financial institutions will not be comfortable with such a structure. This could be a major obstacle for the success of IDF-NBFCs.

Sapre
Many financial institutions have set up IDFs and we have been approached by a few to take-out debt in existing projects. However, till date the number of IDFs and their fund size is relatively smaller compared to the requirement of funding in this sector. It may not be fair to think that IDFs would start substituting banks for infrastructure funding. We may need much deeper debt markets with the debt capital markets also supporting such endeavours along with banks. We have witnessed a few bond issues by infrastructure projects but that is also an area which needs to be strengthened to fill up the funding gaps and prepare for future expansion.

The finance ministry and the RBI have declared IIFCL as an NBFC with reduced capital adequacy norms. What else do you believe the government can do to ease the funding situation?
Dhru
To ease the funding situation, refinancing of delayed projects on case-by-case basis could be allowed without treating them as restructured loans, which will save banks from higher provisioning. The industries under the infrastructure space can be widened. Some relaxation for limited period can be offered to revive projects which have been stalled due to existing norms of RBI.

Sapre
Despite having helped with the funding situation, till date IIFCL has not made a major dent in the overall funding environment. The government may need to further strengthen IIFCL with enhanced balance sheet and also help other alternate solutions emerge. Pension fund and life insurance money is the best option to fund the long term infrastructure requirements. However, given their nature of low risk exposure, the government would need to devise ways of channelling this money for meeting the infrastructure debt requirements.

Sinha
Developing a more robust secondary market for debt instruments will be more helpful, as it will allow banks and other institutions to adjust their ALM mismatches by rebalancing their asset books efficiently through secondary market operations.

Is PPP faced with a survival problem? Will we see fewer PPP projects?
Sapre
For a country like India, PPPs are a necessity, given that the government agencies may neither have the finances nor the ability to fill the gap and provide build-up at the pace required. India had capitalised on PPPs faster than many developing economies but seems to have faltered during its evolution. We need to smoothen out the wrinkles in implementation especially with regard to macro issues like availability of debt funding, development of debt capital markets, policy issues etc. The government should also be cognizant of the fact that reasonable returns have to be ensured for developers without which others would also shy away from entering this market.

Dhru

Additionally, with the economy not growing as projected earlier, revenue projections have gone wrong, leading to issues of financially viability.

The government must address this problem by incentivising such projects.

To sum up, the stalled investment cycle needs to be kickstarted in right earnest through what we can term "5Cs": Commitment to nation building projects like roads, ports, airports with single window clearances and time bound funding to them.

Clarity on Land acquisition, Environment concerns, Raw material availability (Spectrum, Coal, Bauxite, Iron ore etc).

Clearing backlog projects and nursing the salvageable accounts to current with banks. Confidence to stock market of government reforms now kicking off predictably which will allow businesses to raise much needed capital for future investments.

Convergence of better growth rates and move towards lower interest rates.

Sinha
This may not be the case. Project viability is the key concern and this is a reflection of the macroeconomic scenario. The rules of the game will also have to be clear, consistent and beyond arbitrary interpretation. It has taken a lot of effort for the model PPP document to evolve with time and it is quite normal to have periods of stress.

Given the dimension of work that has to be done in the sector, it is necessary that the government involves the private sector in this exercise.