Banks should increase their size to participate in the huge infra lending opportunities

Corporation Bank’s lending grew 30 per cent last year, and its confidence in infra-lending is evident. The high growth will continue, according to Chairman and Managing Director Ramnath Pradeep. In an emailed interaction with Shashidhar Nanjundaiah, he says that the bank’s periodic sectoral lending allocations within infrastructure follow the industry growth trend.

During last fiscal the Bank reported 27.30 per cent increase in business. To what would you attribute this increase?
Of the total business growth of Rs 33,440 crore (27.30 per cent) during FY 2009-10, credit had grown by Rs 14,690 crore (30.3 per cent), from Rs 48,512 crore as in March 2009 to Rs 63,203 crore as at March 2010; deposits had registered a growth of 25.34 per cent and grew by Rs 18,750 crore during the same period to reach a figure of Rs 92,734 crore. The increase in the business can be attributed to an emphasis on growth in savings and retail term deposits on the one hand and an improvement in corporate, agriculture and SME advances on the other.

Tell us about the emphasis laid by your bank towards infrastructure lending.
As against maximum credit exposure ceiling of 10 per cent stipulated for all other activities, our bank has accorded a 20 per cent ceiling for infrastructure lending, in order to participate in the nation-building activity in greater measure.

What was the extent of disbursements towards infrastructure projects last year [2009-10]? Will your plans for the current fiscal be different?
During FY 2009-10, Corporation Bank had sanctioned credit to the tune of Rs 8,410 crore, to different activities categorised under infrastructure activities. The outstanding advances to infrastructure increased from Rs 5,363 crore as at 31 March 2009, to Rs 8,617 crore as at 31 March 2010, showing an absolute growth of Rs 3,254 crore (60.7 per cent) as against growth of Rs 1,872 crore (53.6 per cent) as at 31 March 2009. The bank’s exposure to infrastructure will continue to receive similar priority during the current fiscal. As of 28 January 2011, the Bank’s exposure to infrastructure stands at Rs 11,837 crore, which constitutes 17 per cent of Bank’s total advances level of Rs 69,524 crore.

How do you plan the allocations across the spectrum of industries to achieve growth across sectors and segments? Does this correlate with the growth of those sectors themselves?
Our bank fixes an Aggregate Credit Target, which is further allocated to various sectors, duly considering the national priorities, the bank’s business propositions and the general business scenario. These targets and sub-targets are further segregated among various geographies on the basis of its business potential in respect of each segment of credit. Usually, the credit growth we envisage under each such sector correlates with the growth of these sectors in the economy.

What degree of importance within this allocation would you accord infrastructure lending? And what degree of growth do you foresee over the next two to three years in this segment?
Greater emphasis is being given for hassle free flow of credit to infrastructure segment, especially to highway and power projects, which will directly contribute for all round development of all other sectors. In this backdrop, Corporation Bank has fixed the credit exposure ceiling to infrastructure as high as 20 per cent of its aggregate exposure. We foresee a compounded annual growth (CAG) of not less than 30 per cent in infrastructure lending in the years to come.

How has been the performance of the infrastructure projects you have financed?
Infrastructure projects have a long gestation period and the repayments usually start after long repayment holidays. As of now, the bank has not faced any constraints in receiving the repayments in accounts where repayments have been due. The delinquency rate in these accounts is zero.

Which sectors within infrastructure have been attracting more attention judging from the demand for finance?
There is substantial demand from the power sector and the bank’s exposure increased from Rs 2,077 crore as at March 2009 to Rs 4,899 crore as at March 2010; presently, it has further improved to Rs 6,999 crore as at January 2011.

Which sectors within infrastructure do you see more lending happening in the next year or two? Which sectors would you say are the most active and growing?
In line with the 11th Five Year Plan, power, highway and telecom projects will receive greater share in the infrastructure development, followed by airport development and other sectors.

What are the main challenges of lending for infrastructure projects in India?
The main challenges of lending for infrastructure projects in India are:

• Lending to infrastructure is complex, capital intensive, of long gestation and involves multiple and often unique risks.
• The lending capacity of banks is limited vis-à-vis the credit demands of infrastructure segment. Most of
the banks face constraints on account of their asset-liability mismatches (ALMs) caused by shorter term liabilities as against longer terms in advances (especially those related to infrastructure). Some banks also face constraints on account of capital adequacy.
• Lending on a floating interest rate basis can mitigate the interest rate risk for the banks; however, such risks can normally be mitigated only by passing on the risk to the borrower.
• The expertise in banking industry is limited in evaluating the varying credit requirements of different types of infrastructure industries.
• Infrastructure projects are prone to cost and time overrun problems. Often time overrun arises on account of lack of co-ordination between state and Central governments. Further, inadequate relief and rehabilitation delays implementation of projects.
• The prevalence of high user charges hampers viability of some projects.

Some experts believe that the problems of finance to infrastructure sectors is less due to ALMs or tenure issues, and more because many projects are not structured as per expectations, or projected cash flow statements or other documentation is not satisfactory. What has your experience been like?
In case of infrastructure projects, obtaining statutory clearance from the government departments, achieving financial closure, sanction by all the lenders, and execution of joint documents takes considerable time. Additionally, loan disbursement depends upon the progress achieved in the implementation of the projects, which usually takes a longer period. However, our bank is comfortable with the lending to infrastructure. We foresee that same scenario will prevail even after the completion of gestation period and/or instalment holiday period.

Do you believe that finance for infrastructure projects can be further facilitated?
To facilitate infrastructure lending, the government has taken up initiatives such as providing indirect support through tax deduction to individuals. The Reserve Bank of India (RBI) has created a new category of non-banking finance companies known as infrastructure finance companies besides the existing three types of NBFCs, asset finance companies, loan companies and investment companies.

The central bank has also accorded top priority to infrastructure financing by clearly defining sectors eligible for bank financing under infrastructure lending. Banks have been allowed to undertake take-out financing. RBI has also relaxed the single and group borrower limit for additional credit exposure for the infrastructure sector. The finance for projects can be further facilitated:

• By according permission to reputed corporate groups in infrastructure sector, to raise funds directly from the market through issue of corporate bonds
• By allowing pension funds, insurance and banking institutions to invest their funds in infrastructure bonds

What are the reforms that are required to bring in more depth in our banking structure?
The main reforms that are required in the banking industry in India are:
• Refinancing bank’s existing rupee loans through external sources, like ECBs to be examined, which will—
1. enable foreign financers to show interest and participate in projects at post-construction period, when risks subsides
2. enable banks to have better ALM and to diversify the funding sources
• Banks should be allowed to float infrastructure bonds to avoid ALM.
• The infrastructure lending should be accorded priority status.
• Risk weightage for infrastructure lending needs to be reduced.
• Refinancing facilities to the banks should be extended in line with the Deepak Parekh Committee recommendations, by establishing an Infrastructure Debt Fund with the participation of the government, and insurance and banking institutions.

What reforms would like to see in banking to help overall growth?
Banking penetration in the country is still very low. The low penetration level suggests availability of enough potential for banks to expand their services to support the objective of faster and more inclusive growth set out by the Government of India.

The demographic transition in India, with millions falling in the younger age groups, poses an opportunity as well as a challenge for banks. There would be emergence of new addressable segments such as the middle class and rise of middle level corporates. Banks need to further strengthen their systems to support the needs of these potential clients, especially by offering a variety of financial products based on latest technologies.

The corporate debt market is another area which needs attention. The market is in urgent need of greater depth. While corporates have an active alternate market to raise funds, banks have an alternative investment avenue.

Most of the banks in India have migrated to Core Banking Systems (CBS). With such systems in place, it would be the right time to start thinking about the post-CBS era. Banks would need to reform their systems and processes, and move into areas such as ERP, BPR, CRM, profitability management, risk management solutions, and so on.

HR is another area which requires urgent reform. There is not only a need to retain but also to re-train the employees keeping in view the changing banking requirements. Banks would have to devise ways to be able to continue competing effectively with their private and foreign peers. Though Public Sector Banks (PSBs) have made themselves technically equal, or even better than their private sector peers, there may be a need to link the HR and compensation systems to the employee productivity.

Banks should increase their size, so that medium banks move to higher trajectory within a time frame, so that they may competitively participate in lending credit to highly required infrastructure segment in the years to come. The deficit in the road network, ports, railways, airports, non-availability uninterrupted supply of electricity and deficiencies in various types of urban infrastructure, may be met within the next five years. Besides, further automation, rationalisation, and simplification of banking methodology will contribute in this regard.

Infrastructure financing offers enormous opportunities to banks, as the country will see a dramatic increase in infrastructure investments in the forthcoming years. The Prime Minister has already pointed out that India will need to spend over $1 trillion in infrastructure development during the 12th Five Year Plan. To tap these opportunities, banks also have to create capabilities in client servicing, improve their tech platforms, and improve risk and ALM capabilities.

Corporation Bank's Corporate Lending Portfolio

As at March 2010, Bank’s credit exposure to the industrial sector stood at Rs 30,165 crore, which constituted 47.7 per cent of the Net Bank Credit. Of this, exposure to infrastructure was Rs 8,617 crore (13.6 per cent of NBC); Retail credit stood at Rs 11,696 crore (18.5 per cent of NBC) and SME credit stood at Rs 6,485 crore (10.3 per cent of NBC).