Banks will get conservative in lending to infrastructure

Infrastructure developers won’t really complain about the process of funding for their projects. Their problems remain getting the projects cleared for takeoff. BA Prabhakar, Chairman and Managing Director, Andhra Bank, speaking with Sumantra Das, explains the recent uncertainties and opportunities in infrastructure lending.

Is the country overreacting on the US Federal Reserve’s move on liquidity? How badly will it pinch infra companies?
The rupee had come under pressure for various reasons. I think what is worth complaining is the volatility in the rupee rather than the depreciation of the rupee. If you look at the overall macro fundamental, we have had a weak current account and a hefty current account deposit. At the same time, exports are declining and the difference in inflation between the developing markets and our market is still very high which should get reflected in the rupee value. All these factors have contributed to the weakening of the rupee.

As far as infrastructure companies are concerned, Indian infrastructure companies’ basic revenue model, including revenues and costs, is in rupees, so there is not much impact. But those who have actually funded the project by borrowing funds in foreign currency will be affected.

Banks say we need to get back positive fundamentals. How?
Bringing back positive fundamentals can be achieved in different ways. One is the country’s growth depends on growth potential of companies. The growth potential can be accelerated by investment in few sectors particularly infrastructure sector. The investment in infrastructure is entirely dependent on the policy initiatives by the banks and the implementation of the policy. Companies which have invested in infrastructure sector in the recent past have gone through lot of problems like in getting the projects cleared by various authorities. So the stalled projects need to be revived and the problems need to be addressed, so that they can take off. So this itself contributes to the growth rate of the company as well as to the country. Apart from this, I think the government also needs to create and invest in sectors like agriculture from where the growth can pick up from the current level.

Will it be a sustainable model?
Yes. The short answer is that the policies need to encourage investment in agriculture and increase investment in infrastructure, which has gone through lot of hurdles in the recent past. If these issues are addressed, then of course we can do better than the other markets. Of course, getting back to the old growth rates will depend on how the global economy behaves.

If global uncertainty remains for another few years, what would be the effect on infra finance in India?
If you talk to any of the infrastructure developers, nobody has really complained about the process of funding for infrastructure sector. Their problems are more of getting the projects cleared and take off. Yes, they have a problem with regard to the cost of credit, but not the availability of the credit. The availability of credit has not beena problem, though there are challenges in that. But I think, the country’s infrastructure needs can still be met. As the economic system improves the infrastructure finance will also improve.

Developed countries use financial instruments like Mini permanent in infrastructure sector. Do you think India is still in too primary a stage to use these kinds of products?
These innovations can happen, provided there are certain changes required in the regulatory side to take instruments like in the market. As per the investment guidelines, insurance companies and mutual funds need to be relooked and similarly the RBI’s guidelines on subtly giving the credit enhancement-cum-support to the bonds also requires rebate. If these regulatory guidelines are suitably changed then these instruments can be taken for infra finance.

As lending forms have reached their maximum limit for infra finance, do you think that there is a need to change banks’ exposure norms for infrastructure?
Not all banks reached their exposure level. Some of them might have reached, but I think the bigger still have room to invest in infrastructure. In fact, the current exposure norms are quite liberal and I think these norms will be controlled.

As a banker, how positive are you about infrastructure lending?
It will depend on the viability of the project. A lot of learning has happened in the last 3-4 years, particularly in lending to the infrastructure sector. So, any lender would like to take into account all those experiences and then study infrastructure projects. If they can stand to sustain all this rigour and also challenges that are there then infrastructure lending will be available. It’s not completely dried out.

Are banks becoming conservative on infra finance?
Given that banks have taken substantial exposure to infrastructure sector, their experience has not been very satisfactory in many of the projects. It can be clearly assumed that they will be little conservative in their lending to infrastructure in future.

Is it mainly because of policy issues?
Yes. I feel the risk cutter is arising out of policy issue, something the bank did not factor in much, now they have actually turned out to be real. So they would like to definitely factor in and see how the government is going to address the issues. I think the challenge in infrastructure lending is the policy issues in the infrastructure sector and other things. It requires a coordinated effort of all the ministries. The key challenge is how you ensure that all of them coordinate and then give clearances to the various projects.

Is the problem with the policy or its implementation?
Problem is with the implementation of the policy, the problem is not exactly the policy. I think the policies are known. Many times, the implementation of the policy has been either delayed or weak.

Do you think the idea of IDF will have to mobilise only overseas funds?
No, they can mobilise in the domestic market also. I don’t think it will be intended to be only the foreign investors’ focus fund, of course that can supplement the efforts of the funds in rising domestic capital. We should not expect too much of investment coming from foreign investors into infrastructure sector, because the investors will be vary on viability of this project. The experience so far has not been very encouraging. So, when the domestic investors who understand the government policies, its implementation and developer knows well if they themselves are being conservative, then we cannot expect foreign investors to take a very bold move on the infrastructure sector.

It could be there, but I think to stay this will be entirely dependent on them is not correct. On the other hand, we should see that long term savings that are mobilising in this country is channelled into infrastructure sector. Long-term savings are going to insurance companies, provident funds. These are the main vehicles for us to raise long-term savings in this country. If these long term mobilisers of savings really do not invest in the infrastructure sector, then it will be very difficult to beat the needs of the current economy that is dependent on the investment guidelines given by the regulator. There is a need for them to redo.

Do you think the sentiment of private developers is low now due to a slowdown?
Naturally. If you look at all these top developers, they have become highly leveraged companies because of all these problems. If the projects get delayed for 2-3 years, what is the cost implication of the lower rank? When developers don’t see the project getting completed in time, they will lose the [positive] sentiment. It is easy for us to really criticise the developer, but if the eco system is not supporting them to complete the project, they can’t show high levels of interest in taking up new projects.

Which infrastructure sector platforms are you bullish about?
Our exposure to infrastructure sector is mainly power and road, and it is a mixed experience. Projections are given, earlier they have done well. The experience has not been very satisfactory with the projects which have taken up in the recent past, mainly because of the delays and other similar types of issues earlier. Our exposure to power sector is about 12-13 per cent of the total lending and road sector is about 4 per cent.

Can we see any changes in these two sectors by the end of 2013-14?
Yes, first of all it is recognised that we are not getting any new projects. So when there are no new projects coming in, lending will be very negative. The opportunity for lending will be limited. The disbursement will happen and that will all be the effect of loan booked to infrastructure.

Has the central bank moved to reclassify loans to road builders as secured loans rather than unsecured loans? Will there be another move to comfort banks for lending projects?
Yes, there is a limit on total unsecured loan that you can give. The loan to the road sector is also quite substantial. If concession has not come then banks would have probably reach their limit to sustain long. In that case it has given some relief to the bank.

I understand that the road sector will now see a fresh impetus in investment. What will be the power sector plan?
New investment depends on how many new projects will be cleared by the regulators. In roads it depends on how many floated by the National Highways Authority of India (NHAI) and how many they will cleared.

From a lender’s perspective, which are the major roadblocks to India’s infrastructure development?
One is of course creating the ecosystem of growth for investment in infrastructure. Two, I think the cost of capital for infrastructure has to come down. At these rates infrastructure project viability is affected. One can bring down the cost of capital for these companies. But at the same time, market capital for infrastructure will also need to come down. Third point is I think, recovery of equity market is also very important, because today the promoters have not been able to raise any equity for the new projects and also in their existing balance sheet.

At the same time the bond market is also not growing.
Bond [market] is there but to a very limited extent. Bond market is itself very shallow. Most of the infrastructure funds have not happened through bond market, it has happened through the loan. So to some extent, the IIFCL has recognised that but that is a very small component. Actually, in most of the other countries, infrastructure is funded through the bond market only. We don’t have a developed bond market, we have been funded through the bank.

Will your portfolio in infrastructure be lower in 2013-14?
It won’t be lower, maximum amount cannot be lower, but the percentage term it can be lower.

Which sectors does Andhra Bank see growth prospects?
Today we cannot really give any outlook on where the trade growth is likely to happen, except to say that the growth will definitely happen in agriculture and infrastructure, but in the corporate sector we cannot really tell how and which sector the growth will be. According to me, most of the improvement will come not by project loan. So working capital will be evenly spread out throughout the year.

Which are the verticals of infrastructure you find the better prospect in coming years?
I think roads can do better. I am not very optimistic about power at this stage. But yes roads can absorb investment.