Our infra lending will be cautious this year, based on regulatory parameters and macroeconomics
A ninety-three-year-old Union Bank of India just got a new head honcho. The genial CMD is a sleeves-rolled-up leader much of whose experience has been in operations, and will lead a lending portfolio of Rs 27,000 crore to infrastructure (disbursed), about 15.2 per cent of the bankâ€™s total advances, which include seven accounts (five tollways and two power) for take-out to IIFCL. The bank has also approved around Rs 25,000 crore to the sector pending for disbursement due to non-clearances and other non-compliances such as financial closure, land acquisitions, equity tie-up, fuel supply arrangements, etc. Debabrata Sarkar, Chairman and Managing Director, Union Bank of India, explains why banks should focus on working capital and let term loans be handled by special institutions.
What has been your experience lending to infrastructure sectors?
The tenor is long in infrastructure projects, resulting in asset-liability mismatch (ALM). Most banksâ€™ term loans account for about 70 per cent of the total lending, while the remaining is working capital. Really, this ratio should reverse itself for banks to achieve what they were basically meant to do in the infra sectors: lend working capital. Even as far back as the 1970s and the 80s, when infrastructure was not so much in the hands of the private sector, banksâ€™ and State Finance Corporationsâ€™ lending terms were more interested in capex lending. Even at that time, infrastructure sectors were not the favourite for banks.
Both roads and power, and ports to a certain extent, are doing well. Our lending to power is robust at around Rs 16,503 crore, or about 9.36 per cent of our total advances. However, the power sector has issues. Power tariff revision is a must, and viability is a must for banks to gain a comfort level for lending.
What are your plans for lending to infrastructure this fiscal? Will there be any change from the past years?
Looking at the magnitude of GDP and the potential for investment in infra sector, we will maintain a positive outlook to support this sector. However, the index of selectivity of projects shall be relatively stringent whereÂin the appraisal aspect would be further strengthened specially in the areas of fuel supply arrangement, reguÂlaÂtory compliances, intensified due diligence towards the source of capital, the execution skill of the group and a deeper sensitivity analysis to test the project viability.
In broader terms, there would be an element of chaÂnge in our approach while taking up fresh exposure, in that we will adopt a cautious approach at the appraisal stage specially in the areas of key factors which influences the project viability, such as regulatory parameters, equity source, group strength and project profile, with a pronounced assessment of the macro economics related to the project.
What is the single biggest post-investment risk banks face today?
The biggest post-investment risks banks face today in India are delay in completion and obtaining the required clearances leading to time and cost overruns.
About 30 per cent of your finance in infrastructure is towards power projects. Given banksâ€™ growing scepticism of State Electricity Boardsâ€™ (SEBsâ€™) poor health, how do you foresee power sector financing in the next yearâ€”even those with Power Purchase Agreements (PPAs)?
For obvious reason, banks may adopt a highly restriÂctive approach to lend to SEBs because the SEBs have not been able to pass through the increase in costs to power consumers, due to various factors in our economy. However, looking at the increasing awareness at the natioÂnal level, tightening of norms to protect the health of SEBs and effective intervention of government and the Regulatory Commission, it is likely to consider the proposal on a highly selective basis and banks may prefer to lend to the better managed SEBs.
In future, on account of various issues related to power projects specially in the areas of fuel supply arraÂngement, cost of imported fuel and those projects which have executed PPAs at a very low tariff (in case of Case II bidding) the banks are likely to adopt a highly cautious approach and intensive due diligence.
Banks have finally clamped down on state power utilities demanding a viable projection, without which there would be no lending. Has anything changed since then for banks?
There has been a positive change. To some extent, everybody understands. Viability is key for banks. Power utility is also a public service, so the corporations have their limitations and need to constantly invest capex and other expenditure.
Are there any plans for you to finance SEBs in the near future?
We will take a view after we get the proposal with due consideration to the health of that SEB, project viability and bankâ€™s policy in respect of prudential expoÂsure etc. However, we shall remain sensitive to the requiÂreÂment of this sector and resort to a pragmatic approach on case to case basis.
The government seems to be firm on promoting Public-Private Partnership (PPP) as a core value in all infrastructure sectors. Given issues in viability, is this fair on banks?
The government needs PPP for supply of capital from private companies with substantial equity. SEBs are government-owned and so have limitations in providing capital. In roads sector, all roads may not be viable. But the government has been very proactive in facilitation. I have just returned from a meeting with the Roads Minister CP Joshi and AK Upadhyay yesterday (3 April) on modernisation plans in the roads sectorâ€”an example is automation of toll through Radio Frequency IdentiÂfication (RFID) technologyâ€”to make it convenient for toll operators, transport operators and banks. Automatic debiting of toll charges from bank accounts and crediting of the concessionaire companyâ€™s account will be a win-win situation.
We believe this is a good revenue model for banks, since the concessionaire would have a loan or current account with us so the toll can be part repayment. The toll operator can be relieved of manual intervention that has time and manpower investment. Trucks need not wait in long lines at toll booths.
It is often said that infrastructure project plans in India often lack the â€œproject visionâ€ to clearly portray its viability. What has been your experience?
I beg to differ on this perspective, which may be only true for smaller projects. Project planning may not always be to blame. The vision and project plan may visuÂaÂlise deadlines and costs with small margins of error. But land acquisition, labour shortages and regulatory clearances are leading to uncertainty.
Do we need a revamp in the plan on at what stage, for example, land acquisition should happen?
Yes. The project can be started after land acquisition and clearances are taken care of. If someone, through a single-window method, take care of statutory requireÂments such as clearances, and ensure deadlines are met, projects can be completed effectively. Policies must be made friendly to the lending institutions. Suppose I lend to the textile industry. We do so on the basis of the schedule including the COD. On the other hand, in infrastructure, the players are big, professional and higÂhly experienced. So why are delays happening?
What is your take on take-out financing? Has UBI participated?
UBI was the first bank to enter into a Memorandum of Understanding (MoU) with IIFCL, which has given the in-principle approval in case of seven identified accounts funded by UBI. In case of one account, take-out finance has already been provided by IIFCL and in case of other six accounts the matter is yet to mature for eventual takeout.
Take-out financing is said to suffer from an inherent problem: Banks may not be enthusiastic to let go of a good project once it is in the post-construction, revenue-earning stage. Are you happy with the incentives that IIFCL is offering (whereby 30 per cent of interest earned goes to the primary lender)?
In apparent terms looking at the money market position and the interest rate scenario in the country, the incentives being offered by IIFCL appear to be reasonable. However, considering all dynamic economic situation and interest scenario, Iâ€™d prefer to take a view in some time. The scheme is at its nascent stage and is yet to achieve commercial acceptability amongst the banking fraternity.
Hence, initially, the phase of resistance would be an obvious reaction since a branch would lose a good account wherein the implementation risk is already extinÂguished. The nuances of the scheme are further fine tuned by IIFCL to incentivise the banks and a better realisation of the fact that such arrangement would address the ALM issue in tangible terms, it is likely that as an evolutionary process, the scheme may achieve eventual acceptance.
In course of time, take-out finance will lend the comfort of liquidity to banks. I am sure that with the increases in offtake for advances, banks will be inclined to offer more advances for the take-out finance to ease the liquidity and for ALM correction, and take-out finance will play a significant role.
What is your opinion on differential interest rates for construction and operational periods of a project? Do you have any plans to introduce them in your bank?
The risk profile of projects during the implementation phase generally tends to be high when compared to the risk at the operational stage. Hence there is an imperative need to have a differential pricing to factor the risk preÂmium in the pricing (interest rate) for these two phases.Our bank has already introduced differential pricing.
Whether because of tenor issues or because of project delays, restructuring loans seems to be a brewing norm. In your experience, does this, in the end, help the projectâ€™s health?
Generally, tenor of the project does not affect the heÂaÂlth of the project; however project delay will have a conÂsiderable impact on the cash flow and project viability.
Our bankâ€™s experience says that timely restructuring support to deserving viable cases having a promising buÂsiÂness model is useful and a workable solution to protect the interest of the lenders on the long run as well as to promote effective utilisation of such large project assets created by such companies.
Power, especially SEB accounts, have been restrucÂturing their loans. Weâ€™ve restructured Rajasthan SEB.
International rating agencies have downgraded Indian banks recently. In your opinion, does this nation have enough experience in infrastructure to be called stable and low-risk? Should rating agencies adopt different or additional parameters to rate infrastructure related advances?
Infrastructure projects in emerging economies like India are perceived as vulnerable to risks, and the governÂment is already making efforts in this direction, incluÂding enhancement of exposure norms, liberalisation of policy for external commercial borrowings, greater partiÂcipation on PPP and certain aspects that should be streamlined, such as the single-window clearance approach, a deeper penetration of secondary bond markÂet and credit default swap market.
We require time to improve because bank lending to infÂrastructure is in its nascent stages. Rating agencies judge us on Capital Adequacy Ratio, NPA management and threats, asset quality, etc. It would be premature for them to give their comments on a bank attributing those factors for some failure.
Rather, agenÂcies should appreciate the fact that banks, which were not into infra lending earlier, have now entered the arena. Is the bank going in the right direction? Is the exposure acceptable in comparison with industry levels? Are the revenues in tandem? These should be separately factored in. If an agency decides, on the basis of restructuring four or five power sector accounts, especially since weâ€™re public sector, that the asset quality is bad, then we need a rethink.