Correction in macro-economic fundamentals, the government's efforts to resolve power and roads issues, and policies being formulated point towards a healthy future. SS Mundra, Chairman and Managing Director, Bank of Baroda, explains to Sumantra Das why he would continue to bank on big ticket projects in power and roads, but cautions that the fallouts of restructuring and other newer phenomena may impact the bottom line.
As a banker, how positive are you on infrastructure lending?
As of today, there is not much of demand from infrastructure projects or rather little slow on demand side but once these issues (above mentioned) are resolved, I think as a banker, we would remain focused on infrastructure because it is very important for our portfolio. But yes, I would also like to see that we should have more capacity or we should keep on doing that once the structure is in place to originate and then distribute. Then the new origination and distribute, this is how the whole market mechanism should work out.
Do you think that India's infrastructure growth story will be a successful one?
Yes, there are issues around the whole infrastructure development. But, I would like to start with the first point that if we have talked about India's GDP growth of 8 or 9 per cent so does infra growth is must. If there is no growth in infrastructure, then all other things would never materialise, which is very clear. The most live example is our neighbourhood China where the kind of growth they have achieved is huge.
The development of infrastructure is necessary, basically for two reasons. Number one is to provide the necessary platform to other industries. If there is no basic infrastructure, you cannot talk about any industrial growth. Secondly, the amount of investment which goes into this activity has a naturally self-sustaining effect on economy those are the larger issues. In the current environment, there are challenges but the good point is, of late, a few good things have happened which gives a positive indication. The macro-economic fundamentals are becoming slightly better or some correction is happening. The second part of it is that the government has also taken a call on the various policy issues around. As a result, the Finance Minister held a series of discussions across the country with various promoters of power and road projects. The government is also trying to understand what can be done to resolve these issues because the issues in infra¡structure sector are more of policy-related. So, I am optimistic on India's infrastructure growth story.
Don't you think private players are losing positive sentiment day by day?
India still has a long way to go where we can say that we have saturated and now any more infrastructure projects is just unproductive. So, there are opportunities for private players for future growth.
There are certain issues but is more around policy. At the same time, the government has taken some positive approach like the Cabinet Committee on Investment (CCI) has been formed and at least it has started holding the meetings. CCI has also taken a couple of decisions and picked up some projects in sectors like power, gas, and fertiliser. Besides, there are mechanisms which are already there and being further put in place like IIFCL. So when all these things are in place, I don't think there will be many problems for private players.
Will IDF remain as a description only?
No. IDF has come into existence slowly. Earlier there was a description, but today at least IDF has three or four ideas which have been formally launched. But ultimately the idea will have to mobilise with the overseas administration as only they can create those kind of huge funding. Otherwise, if there were to only mobilise the indigenous funding then that will be not much helpful.
Currently, developers are preferring ECB route. Will it be a burden for banks?
Yes, it is true. ECB route is a burden on the banking system. Developers are preferring ECB, as banks as an entity have the capability to do infrastructure and financing with certain limitations. Today, the situation is like most of the banks are already reaching their limits. So, the ideal thing is that once all these entities are there, banks should be able to originate because they have a client relationship and then at some point of time they should be able to distribute it, upload their portfolio and then again do the fresh. For that you need the instruments like IDF and IIFCL along with the insurance and pension fund to be in the market.
When the idea of bond market is yet to develop in India, how it will speed up infra finance?
I think it will speed up and will speed up out of necessity. Four to five years back, it was a new activity for the entire banking system. So, we were practically started with a zero exposure. But, now once we have the target, we have the route and then the capability of the bank would not be the same what it was in past three to four years. It means there will be a greater urgency to find the alternative, so out of necessity I think these things will get expedited.
According to you, which sector did not perform well? What is your bank's current exposure to power sector?
In the given situation, as majority of the capacity is still under commissioning, there are clearly several issues around the power sector. Besides, in road sector, it has still done reasonably well and going forward in the near future this appears to be a sector which would keep on doing well because a single regulator concept is a welcome move for the industry.
Will exposure to power sector remain the same for BoB in FY 2013-14?
There are two major things, one is absolute terms and another is percentage terms. In percentage terms, it will remain more or less the same. While there may not be many new sanctions coming, the existing sanctions keep on coming. So, this will add to the absolute outstanding but because credit will also grow in percentage terms it will remain more or less the same. In absolute term, obviously it will increase because as I mentioned that in infrastructure, most of the capacities are under creation. Presently, it is more one way where the disbursement will continue but repayment will start coming in very few projects. So, in absolute amount may increase the percentage term may remain stable.
Will introduction of regulators work as a catalyst for growth?
My feeling is that it should be a positive development, at least in roads segment, and with that there would be better coordination with the NHAI. I feel that this kind of regulator probably have some past lessons to wrap on from and they will circulate the right lessons so it will be a more pragmatic approach.
When will BoB be able to bring down the number of NPAs?
Probably from the second half, we will see the NPAs coming down. If you look from the December quarter to March quarter in domestic NPA, there had been a reduction both in percentage terms as well as in absolute terms. It was a minor reduction but there was a reduction. But at the same time, there were increase in international NPA in March, that is how the overall percentage reduction is looking very small. As a matter of fact, domestic NPA in December was 3.21 per cent which has come down to 2.81 per cent but what the overall gross NPA reduced is only from 2.41 to 2.26.
Can we see any change in lending of BoB in FY 13-14?
In the first quarter of a financial year, one cannot get any indication. However, in previous years we have seen first quarter always had very slow activities. Banks are also busy after closing their annual results. So whatever comes from this quarter is not indicator of anything. The real indicator of what is happening in the economy will start getting only after third quarter or second half.
Did you participate on restructuring of discoms? How much was your participation?
Yes, we have participated on restructuring of discoms. BoB's participation on discoms stood at Rs 6,300 crore.
Given the present scenario, will you prefer for fresh lending to power sector?
As a banker, you are never in a position where you say that I will not do at all in this sector or I will do everything in this sector. It clearly depends on case to case. If I have a case where there is a clear backward linkage and they have their own list of mines, projects, power purchase agreement (PPA) and a reasonable confidence on developer, then there is no point to denying fresh lending. It is not that all the companies in the country are financially weak.
So that way, bank becomes more selective on a project.
Banks have already become very selective, that is a matter of fact but there is nothing like a complete no. A strong project where only the parameters are all clear and we are convinced about the viability then why not? Even it applies to roads sector.
What is BoB's 'refocus on growth'?
We are the second largest lender of the country. I cannot say that I will not be lending to one particular sector. The bank will continue to be in all spheres of lending. Our refocus means only our efforts are that in agriculture, retail and MSME. We should be able to go slightly faster than what we think we got to do so that over a period of three to four years, we will bring a little more balance to our portfolio. The consumption de¡mand in India continues to be good, so even with the slowdown and all the stress, the demand on retails side of the business continue to be good. It is not affected like the other sectors. However, I think the efficiency of process is the only thing which can help anyone to capture the market share.
Will BoB increase its presence to new geographies?
We are not looking much for new geography given the global economic scenario. But yes, we would like to expand our reach within the geographies where we are already having our presence. Now if you have in-house capital requirement you have to be very careful whether you are using it by putting that capital efficiently or not. And if I have to do a balancing act between putting the same capital in India other than putting it elsewhere, I have to see whther I am getting a better return or not. I might go global but the scenario is still very volatile. We cannot say that risk is completely away from the global market. So, in this situation, I would like look to take risk which I know better and I know the Indian risk better than any other risk.
Besides, the concern for regulator is also increasing everywhere. It is becoming very sensitive. So as you go and knew a new area, you should be very clear that you should be able to meet with those regulatory expec¡tations.
Do you think that India's worst is over and the country is in its growth path? Which are the roadblocks the country is facing today?
I cannot say that the worst is completely behind, may be there are two points of it from whatever various pronouncements are done today. Some of the actions have started if they move in the same direction and get completed then yes. The issue is that there is a large capacity which is under creation and which is waiting for the policy of resolutions. It may be from central admi¡ni¡¡stration, state administration or local admini¡stration. Other side of this is the regulations. Now our regulation is rule-based. So, under the regulation even if there is a delay in Commercial Operation Date (COD) it will be restructured. Even if you are treating extension of COD as restructuring fine because COD extension means there will be some time overrun or cost overrun.
CDR seems to be norms for most of the infra companies.
I would not say that all the companies which are going into CDR is only for above mentioned reasons. CDR is a good mechanism for any enterprise, there will be some difficulties and particularly in the last three to four years exceptional environment there so many policies and issues came around all the sectors. In such a situation the mechanism like CDR is very important.
Do you think allowing licence to the new entrants in the banking sector will boost infrastructure finance?
Banking licence is what RBI has given with the framework where they should be at par with all the existing lenders. There is no special dispen¡sation for the new licences. So private sector now ope¡ning branches in unbanked centres, meeting the require¡ment of financial enclosure, meeting the require¡ment of CRR and SLR is at par with mentioned framework. So, by the time they create the capability of financing infra sector, it will take some time. But of course there is a need of more players in the country. However, some of them (those are already applied for new licence) are already infra-financing in one way or the other.
Will BoB's portfolio on infrastructure be lower in FY 2013-14?
Financing infra projects has various uncertainties. At the same time, not many new projects are coming in. Even if they are coming, we are very selective about taking it but suppose things are to change drastically in next three to six months then this is one sector we would like to be still aggressive. We have not decided anything yet and will take a call as we move forward.
Which are the verticals of infrastructure BoB finds a better prospect?
Roads sector is doing well. Going forward, the biggest sector in infra would still remain power and it would be even relevant because there are still a lot of unsatisfied demands, it is not reaching the saturation. So once the related standpoints are sorted out, I think power will continue to be a very important sector in India.