In a freewheeling interview with Rahul Kamat, M V Tanksale, Chairman and Managing Director, Central Bank of India, says that although discoms are going through a rough phase, it is the prime responsibility of state government to initiate various measures to salvage the financial situation rather than restructuring the exposure of banks.
Banks, including yours, are complaining that cash is very tight in the market. Have you come across liquidity crunch during the last six months?
At present, I donâ€™t think there is liquidity tightness as it used to be in March. The Cash-Reserve Ratio (CRR) cut was declared on 10 March 2012, when it was reduced to 4.75 per cent from 5.50 per cent. For the banking sector as a whole the liquidity release was only Rs 48,000 crore. This accounts for only 1 per cent of the total advance of the banking industry and 0.60 per cent of the total money supply. And recently there was a cut in Statutory Liquidity Ratio (SLR) by 100 bps from 24 per cent to 23 per cent. This allows banks to sell securities or raise loan to improve its liquidity position.
However, a major liquidity crunch has arisen out of the slow growth of resource mobilisation. Today, the issue is we are not raising any high cost deposit, so we do not want to raise liquidity by paying higher cost. For the industry as a whole, the deposit growth during FY2012 has been only 13 per cent (excluding the last week surge due to mobilisation of bulk deposits and certificate deposits). It is expedient on the part of bankers to reduce the cost of resources: Without that, we would not be able to reduce the interest rates in lending, although it is needed. I believe there should be a cut in interest rates, but the question is how to do it.
Most projects in India are bank funded at floated interest rates, which, in turn, have affected the project structure within the financial margin. In such a situation, how can the government enable covering debt services from project cash flows without sponsor support?
Whenever banks have approved any project, we conduct a Sensitivity Analysis on variation of interest rates. In my opinion, the interest rates (floating) have to go up in a situation when the cost of fund has increased significantly, irrespective of what area you are financing to. Having said that, infrastructure projects, especially those have been delayed and are yet to generate revenues, are a difficult problem. This has also created difficulties for the banks. Most banks have had to restructure such advances at the cost of higher provisioning (affecting thereby profitability of the banks). Since infrastructure projects have long gestation periods, one cannot expect that banks should lend money on fixed interest rates for 15-20 years. Thus there is a need for government support in way of providing guarantees and tax concessions etc to keep the sector financially viable.
Do you also take the cost overrun into consideration?
We always keep a margin for cost overrun while lending to any project, and figure how it is going to be funded. We have always witnessed that when we priÂmarily assess a project, the project looks absolutely norÂmal, but there are issues which we cannot ignore while undertaking any infra project such as land acquisition, availability of raw material and its fluctuating cost.
But several banks have started bringing down the rates on certain loansâ€¦
I do not think that any bank has started bringing down interest rates on project finance. It is the retail mortgage-based or security-based loans where the inteÂrest rate has been brought down by the banks. The loans that are mentioned above are more secured, so the inteÂrest rates have been softening. Project finance is a risky business, with the degree of riskiness depending on what mode of project a bank is lending to (annuity, BOT or EPC). The rates of interest for project financing ranges anywhere from 11-12.5 per cent, but it depends on the creditworthiness and credibility of the project executor.
Recently, the Planning Commission has said that to improve situation of debt ridden State Electricity Boards (SEBs), the loans provided will be restructured into bonds. But restructuring of loans is considered to be a big concern for many bankers. What are your thoughts?
Restructuring of loans is not a permanent solution to the problem faced by electricity boards. This has been proposed to prevent slippage of accounts of nonperforming assets (NPA).
The only solution is to put the reforms of electricity boards on fast track. The revenue generated by the boards has to be sufficient enough not only to pay for the purchase of power from generating companies but also generates profit to repay bank loans. The discoms have been going through difficult financial position on account of their inability to recover the cost from the consumers. Loss of revenue on account of the theft and distribution is a major concern of the discoms. The electricity purchased, at times, at market rates and the same is supplied to the consumers at rates much below the cost of such purchase. The need to supply electricity to the families below poverty line has also added to the situation.
The discoms have either not been submitting regular petition for tariff revision or they have not been able to get the approvals for revision of tariffs from the State Electricity Regulatory Commission (SERC). State goveÂrnÂment has not been able to meet the loss of the discoms fully from the time leading to the present difficult financial position. On account of this, it has become necessary to restructure the loans given by the banks to discoms to avoid such loans becoming NPA in the books of the banks, besides allowing the discoms to implement the reforms.
Various measures are being initiated by the discoms as well as state governments to improve the financial position. The loss on account of theft and distribution has been slashed to 15 per cent, the purchase of high power at high cost is being curtailed, in some of the states more thrust is being given to increase generation of electricity, and more efficient pump sets are being installed by the farmers to conserve the electricity. The state government has started supporting the ailing discoms by increasing the cash subsidy, compensating the loss on account of supply of electricity to BPL families, allowing discoms to retain the electricity duty collected by them and making it compulsory for the electricity board to file tariff petitions on regular intervals.
According to you, which sector is the most difficult to finance and why? What are the glitches in such sectors? And how do we overcome with such glitches for the betterment of the country?
Financing to power and road sector has become difficult as we find delays in coal linkages, getting neceÂssary approvals and general downturn in the economy has affected these sectors. The contractors have also beÂcome cautious in bidding for new road projects. There have been delays in getting payments from NHAI and other government authorities besides delays in land acquisition. Quick clearances from government authoÂrities, whenever necessary, to clear the vital project of national importance, settling mining and coal issues, increasing the confidence of investors by assuring safety to their investment in the country and releasing the dues for completed projects will go long way in giving fillip to such projects.
It seems nowadays there has been a pressure cooker situation as infra sector is under tremendous stress and financing is also not improvingâ€¦
Absolutely! The delays in getting approvals and clearance have been one of the major concerns of the infrastructure sector today. This has resulted in cost overruns and inability to meet the financial commitment by corporate leading to stress with financing banks and institution. In another case, due to the present situation of the existing projects, the bidding process for new projects has been sluggish. At the time of financing the project, the viability is being established keeping in mind timely completion of the project and the expected cash flows.
Take-out financing is expected to be a key channel for financing infrastructure project. But that has not been shaping up. According to you, what went wrong in this scheme?
To be honest, nothing has gone wrong in this scheme but over the period of time banks have felt that the financing institutions should be compensated for the risk that has been taken on the project. In simple busiÂness term why should I give asset to IIFCL for a lesser value when I do not have an opportunity left?
Secondly, IIFCL is looking at taking out only assets that have started delivering (toll road projects) on which a banker has already taken risk while lending. In such case, as a lender for such project, I am not in a comfort zone to give away my asset to IIFCL by taking away these loans from the books. In fact banks may not like it at all in the absence of adequate compensation by way of increase in interest income. This could be one of reason for take-out financing not taking off.
But according to me itâ€™s a good product to support infrastructure growth. Ultimately when you are looking for Rs 2 lakh crore investments in infrastructure sector none of us bankers can go beyond certain limit.
How has the asset quality been holding up at the bank?
Asset quality deterioration is a direct result of the slowdown in the economy. The IIP growth rate has been one of the lowest during the decade. The investment climate is still concerning. Inflation pressure is still looming large, restricting the regulatory agency (RBI) to bring down policy rates. All these factors have affected the companiesâ€™ bottom line, thereby leading to failure in serving bank loan and interest and causing stress asset situation for the banks. There has been slight increase in NPA of the bank which stood at Rs 7,510 crore as against Rs 7,273 crore as on March end.
How open are you for economic revival and recovering your money?
Economic revival is bound to come. It is only a matter of time. A typical business cycle has a life span of five to six years. We had already passed four years (taking 2008 as the base). So the revival is expected say by 2014. There is enough opportunity in my country to attract the investments on infrastructure and there are ample of other opportunities too. Thus, I feel more than the ecoÂnomy, it is necessary that the confidence level and sentiÂments should get corrected towards positive growth.
What level of credit growth are you looking for your bank in 2012-2013? How have your disbursement been for the first quarter of the current year?
The credit growth should be in line with the industry. If RBI feels it should be 15-16 per cent, as a banker I am okay with it. But we proposed to grow our credit profile by about 23 per cent. The infrastructure portfolio of the banks stood at Rs 33,212 crore as on June end showing year-on-year growth rate of around 26.52 per cent.
Central Bank of India (CBI) is planning to form a joint venture with Punjab National Bank (PNB) to enter Mozambique and you have also 20 per cent stake in Indo Zambia Bank. Any specific reason that your bank is interested in the African market?
CBI has been in Zambia since 1983, so our experience of running a bank there has been pretty good. After acquiring 20 per cent stake in Indo Zambia Bank, we had applied for a subsidiary in Mozambique last year to Reserve Bank of India and had applied for a representative office in Kenya. I am happy to tell that we had already received the necessary approvals for Kenya office and we should be opening the representative office in three months time.
So why Mozambique? The country is rich in mineral resources and has large reserves of untapped minerals, ores and coal, and will become a major producer soon. Many corporates, who are associated with CBI, are lookÂing for a business opportunity in Mozambique. While making a choice, we found that PNB, which has presence in Kazakhstan, and have an experience of running a subsidiary in London, hence, became an obvious choice for us to go ahead with PNB for a joint venture.