Andhra Bank recently announced plans to focus on infrastructure lending. Although relatively modest in volumes, at Rs 12,650 crore, the bank has devoted approximately 19 per cent to infrastructure. In a chat with Shashidhar Nanjundaiah, Chairman and Managing Director R Ramachandran, who assumed charge last September, proposes several strategies that are amenable to midsized banks, including differential rates and bundled monitoring processes.
How has Andhra Bank's lending been to the infrastructure sectors? Which of them have figured on top? What degree of importance within your overall allocation do you accord infrastructure lending?
Within this sectoral allocation, infrastructure assumes greater significance considering the quantum of funding and its growth prospects. As per the published data on the industry wise deployment of bank credit, around 13.5 per cent of total credit is deployed to the infrastructure sector. Our bank's credit to infrastructure is approximately at around 19 per cent of its total credit as on 31 December 2010. We expect to maintain the growth trend in line with the industry.
We have largely financed power, roads and ports, besides a few in the telecom sector.
What is Andhra Bank's lending plan to the infrastructure sectors over next one year or so?
We already have a fairly decent exposure as far as infrastructure financing is concerned. We should be able to continue the growth trend for another two years as there are sufficient undrawn limits within the exposure limits.
Going forward, although we would like to take a greater share, the bank could run into ALM mismatches because of the large quantum that infrastructure sector needs on a long tenor basis. For this reason perhaps, we will be selective in picking up further exposure towards financing mega projects.
Infrastructure financing does not end with financing core projects. There are also support services and ancillaries, such as equipment financing. Support services will also emerge as a major opportunity for the banks.
What are the main challenges of lending for infrastructure projects in India? Do you believe that finance for infrastructure projects can be further facilitated?
Infrastructure projects have long gestation period because of which banks have to commit funds longer than their liability tenures. It also requires project implementation review on a continuous basis, till there are stable cash flows.
In some cases, the infrastructure project needs large equity capital from promoters. In some cases there may be delay in bringing the share capital and consequent delay in implementation resulting in cost overrun, initial losses, postponement of COD, etc.
Regulatory clearances: Infrastructure projects require a host of regulatory clearances from various Government bodies and organisations and at times banks are required to enter into commitments, pending clearances, which poses credit risk for the banks in the event of eventual non-compliance. Since infrastructure is one of the identified national priorities, there has to be active co-ordination among various agencies for facilitating clearances, thereby reducing the risk for the lending organisations.
Regulatory exposure norms: As per RBI guidelines maximum exposure to a unit and to a group with respect to infrastructure projects is stipulated at 20 per cent and 50 per cent respectively of the bank's capital funds. Even within this, banks may face constraints to take up additional exposure, if sector specific limits are not high enough to expand lending. Current regulatory guidelines treat lending to step down project SPVs floated by infrastructure companies under the group borrower limits, even when the lending is without recourse to the parent company. Such stipulation restricts the ability of banks to lend. As such, there needs to be a relook into categorising step down subsidiaries/SPV (without recourse) as part of group exposure limit.
Restructuring norms: Present restructuring norms allow an infrastructure loan to be restructured only once during the facility tenor if such restructured loan is to retain its classification status under Standard Asset category. Given the complexities involved and the door to door tenor being as high as 12-18 years in several cases, there is a case for modifying the norms subject to certain conditions.
What risks do you perceive in infrastructure project lending?
Internationally, some amount of state funding takes place for infrastructure before PPP models emerge. Infrastructure first comes in before economic activity steps in. In our country, infrastructure typically emerges when there is a demand for it. In economic terms, it means the demand is already there. So when infrastructure emerges, it is made to emerge in a hurry.
Risk perception in the infrastructure sector—more so in the power sector—is on the higher side. Setting up a coal based power project, for example, entails regulatory clearances at the state level, environmental clearances, and tie-up of coal supply linkages for uninterrupted supply of raw material, tie-up of power sales on a cost plus basis etc. It is not as though things fall into place. It is easy to conceive of debt, equity tie-up and financial closure, and conclude that everything else will follow automatically. But in reality, project alignment and execution capabilities are key factors to look for in the borrower company followed by delivery and project management capabilities. As bankers, we take risks taking into account certain assumptions of cash flow and accord certain weightages to the promoter's capabilities in bringing in finance, even in getting clearances from the authorities concerned. Banks have become cautious after many projects encountered hurdles in getting regulatory clearances.
There has to be a greater awareness of the risks. Indeed, a bank should study and assess whether the promoter has a fair understanding of the risks involved. This means that the banker's awareness has to be high. This is not always the case,
especially in mid-sized banks. Bigger players, who have a core infrastructure team as part of their credit team and have a professional syndication team, do their homework well.
For banks like Andhra Bank, who take on a participatory role in, say, a consortium, it is important that we are as aware of
the risks as the leader bank that initiates the preparatory work with the promoters—even if we are tail enders, taking only
a small percentage of risk. This means we ideally need a proper assessment and monitoring team within the bank. And this in turn means having value-based skills in-house.
Are you happy with the way infrastructure projects are priced by banks?
At the time of tie-up and as part of offer document, an interest spread pricing structure is stated in the term sheet. Normally, the pricing structure is more or less uniform during the entire tenor. It is linked to a base rate with a mark-up it, and the entire interest cost for the borrower goes up and down as the base rate changes.
Rather, we need a risk-linked interest spread structure over the base rate: a spread that is significantly higher during the execution stage. Alternatively, the borrower should come out with significant amount of credit enhancements during the period if the interest rate has to be uniform. This becomes a trade off between risk and return. Once the company starts commercial operations and starts delivering and generating stable cash flows, then it is more a case of receivables management. There can be uncertainties at that stage also. I am not ruling those out – but it is during the execution stage that the men will be differentiated from the boys.
How?
As banks, we must understand the risk at the execution level, and then see whether banks are adequately compensated for the execution risk. There are different levels of players in the market today. The first level players are professionals and specialists with financial staying power with a strong track record of having executed a large number of projects and unlikely to be willing to work out anything at a differential pricing. For this category, the financing will be dependent on the rating of the company and the background of the promoters. But we also deal with other types of entrepreneurs who step into this space, even fresh ones, because they are all drawn from the lure of the extra profits that may come from infrastructure. This is not a sector where one can merely outsource and align on a “cut and paste basis” and achieve profitable execution.
How do you perceive the risk once the project is operationalised?
Basically the risk starts getting shifted to possible volatility in generation of cash surpluses, based on market conditions and external factors. There is a scope for review depending upon, say, whether revenues are stable. We could either re-fix the interest rate or the infrastructure company might package all the receivables and get them rated as a structure obligation, as in the case of annuity projects. Where there are stable cash flows that are accruing year after year out of these projects through, say, power purchase agreements (PPAs), there will be an effort on the part of the borrowing company to package it and try to refinance it. The risks at that stage could be relatively small and so refinancing might be feasible. The refinance typically entails lower interest spreads.
Differential pricing concept is prevalent abroad. Although it may not work in all cases, it is worth examining for infrastructure projects.
Do you think that banks in a consortium should have individual representatives for risk assessment?
Risk perceptions may vary from bank to bank. So every bank has to look at risk based on its own parameters. Secondly, although the evaluation may be from a team of professionals from some other syndicating bank, there is certainly a responsibility cast on the part of the individual participating bank to do a comprehensive assessment. While developing appraisal skills in-house is to be encouraged, individual banks in a consortium may not be able to match up to the skill sets of those who made the assessment and got the mandate for tie-up.
In infrastructure financing provided by players in global syndication, there is a 'facility agent'. This agent is either one of the participating or another organisation, and takes care of lenders' interest in regards to compliances so as to ensure that there is proper monitoring of adherence to covenants of agreements and terms of sanction, assessing the status of compliance in regard to regulatory and other aspects and so on. The bigger the size of the project, the greater would be the complexity.
The facility agent represents the interests of all the lenders as a sort of a paid trustee and can perhaps be assigned an expanded role to monitor infrastructure projects with skill levels decidedly higher than what a participating member banker may possess. Compliance is a key issue and hence the need.
What are your thoughts on critical HR with technical skills that you might require among specialists in infrastructure?
Specialised HR is at evolving stages at various banks. Particularly if I talk of mid-sized banks, such as Andhra Bank, our skill sets are just about adequate and there is lot of room for improvement. We send our staff for specialised training programmes; on-the-job exposure in some of the well-run infrastructure financing institutions would help.
What kind of expertise do banks require in particular?
We need a core team whose domain knowledge will basically be credit, but will be composed of people with engineering and project management backgrounds with sufficient hands-on experience through site visits and monitoring of project execution.
The skills required for appraisal are based upon evaluation of risk, evaluation of the financial fundamentals, and then evaluating the assumptions underlying the projections, such as cash flow projections, and then trying to assess the capabilities. Monitoring is more about the compliance, somewhat akin to what facility agents would do.
What kind of advisory can banks provide?
The advice given by the bank will largely be on the financing and merchant banking side, the type of funding, the debt-equity mix, the options for funding through rupee-foreign currency mix, scope for raising foreign currency resources, providing suggestions for bringing down the cost of funds etc.
Can you bundle support services lending with core project finance in some way?
It is better to keep them separate.
Do you think that it is a form of risk mitigation?
Financing support services is not necessarily risk mitigation. Sometimes there can be risk aggregation also. It is another kind of activity, an opportunity that a bank should not lose sight of. When an industry grows, the ancillary will, too; say, when private ports grow as a sector, support activities will also grow by leaps and bounds.
Your take on take-out financing?
Currently, Andhra Bank has not reached the threshold level where there is a compulsion for us to tie up for take-out financing, but it is certainly a good scheme over a period of time. It will act as some sort of a risk mitigator. If a bank runs into a concentration risk upon reaching a threshold exposure level with more projects coming up, take-out financing provides the opportunity. Previously financed projects that have reached the COD stage of revenue generation can be taken out.
But here is the problem: If we have been with a project through its tougher times, through bigger risks, why would we give it up for take-out at a smooth sailing and low-risk stage? Especially if differential pricing comes in, take-out financing will have a different implication.
What are the reforms that are required to bring in more depth in our banking structure? Are you satisfied with the quality of the assets, particularly long term loans in general and project loans in particular?
Establishment of specialised bank branches in select metros to handle big ticket infrastructure finance proposals with provision of adequate skill sets, with segment wise specialisation. As infrastructure projects move away from projects under execution stage to stable cash flow generation stage, there will be more and more of securitisation and eventual asset trading, thereby bringing more depth to the market.
As regards asset quality, most of the projects that we have financed are still under the implementation stage. For our Bank the share of advances to infrastructure sector categorised as NPAs as a percentage of total NPAs is negligible (as on 31 December 2010, it was at 0.001 per cent). As of now, we do not envisage any spurt in NPAs on the infrastructure front, though there would be instances where CODs may be stretched up beyond the prescribed time frame warranting classification as NPA.
Which sectors within infrastructure do you see more lending happening in the next year or two?
We anticipate more lending towards power (generation and transmission) and roads (annuity and toll based for both state and national highways) since undrawn commitments in these sectors are relatively high. We also expect projects funding opportunities to come up in the areas of urban water supply, other urban infrastructure and waste management. There could be increased lending happening to sector producing non-conventional energy.
Urban infrastructure is a sunrise industry, but then there are plenty of risks in urban infrastructure that need to be assessed. It is not a straight and simple model. It needs to be studied, but banks will certainly be forthcoming to enter urban infrastructure.
Andhra Bank's Infra forays
Andhra Bank's infrastructure lending (comprising lending to power, roads and bridges, seaports, airports, metro rail, educational institutions, SEZs, telecommunications, gas transportation, hospitals, cold storages and rural godowns) was at Rs12,650 crore (approximately 19 per cent of its total lending). Power sector was at 10 per cent.
The extent of disbursements to infrastructure projects during 2009-10 and 2010-11 was at Rs 4,500 crore and Rs 3,600 crore (provisional and subject to audit) respectively.
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