Restructuring is fast becoming a norm among infrastructure and power companies in particular. With a 30 per cent exposure within infrastructure to power, SBI has been acting on both restructuring as well as advising the government on what norms to adopt for discoms before finance. Santosh Nayar, Deputy Managing Director, Corporate Banking Group, State Bank of India, explains to Shashidhar Nanjundaiah how the new risks in infrastructure finance are managed.
It is often said that infrastructure project plans in India often lack the “project vision†to clearly portray its viability. What has been your experience?
We get a lot of projects where viability is not very clear and some where it is. When the viability is not clear, we try to work with the corporate client and suggest ways to make it clearer and where is does not get clear we do not accept the project. SBI Capital Markets is our advisory, and we work with either them or another merchant banker. If it does not get clear with our intervention, we do not proceed with the deal.
To what extent will Infrastructure Debt Funds (IDFs), recently announced, help in your Asset-Liability Mismatch (ALM) issues?
Definitely, if it works out. At the moment various sponsors are talking to investors amongst themselves trying to structure it. IDF will conceptually help because post-commercial operations date (COD), the banks will be able to pass on the debt to IDFs. The customer will benefit because post COD they will get low interest rates. But we will need to exaÂmine whether IDF itself will work, because the aim is to attract investment primarily from outside. The way to succeed is if it attracts more funds—domestic as well as international. So the question is, what makes the domeÂstic investors comfortable, whether hedging mechanism is available, whether you have a secondary trading marÂket in the bond, whether rating will be available, etc.
What about SBI? Do you have plans in that direction?
Yes. We do.
What is the advantage that you see in going ahead with this?
Where there is project financing, somebody in a bank has to appraise it and establish the viability. These appraisal skills are with the banks, not with insurance companies or other outside investors. They have long term funds with low-risk, lower return kind of a business, whereas banks can cash in on their appraisal skills and fund a project, charge higher rate of interest up to COD, and move out. Banks have the sectoral caps, and post-COD, they can move out and take up new projects. We are looking at the ability to fund more projects and ability to manage ALM and ability to manage your exposure caps.
On a similar note, take-out financing, which was recently modified, 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. Do you think it would be a good incentive if SBI and other banks have differential interest rates for construction and operational periods of a project? What is the solution to this?
Take-out financing will come when banks are rewarded for taking the exposure risk through the COD, appraisal and all that. As you know, banks carry a higher amount of risk before COD. So the customer needs to benefit by a differential interest rate—higher rate pre-COD and a lower interest rate for a longer period of operation post-COD, so that the average cost works out lower. Post-COD investors get the advantage of a more or less certain cash flow since the project risk is over. So they can deploy their long term funds for long term return. Pre-COD lenders get a higher rate of interest, can encash his appraisal ability, and are able to churn the portfolio. Overall, the country benefits because this way, more new projects can be financed.
Will SBI venture into take-out financing?
If a project is attractive and viable, and if we need to because we are reaching a certain level of sectoral exposure, we will consider it.
Do you see that in the near future, your sectoral exposures peaking out?
That depends upon how much capital we get, how much profit we make, how many new projects are in the offing, how the sector behaves and so on.
Do you see that happening in the near future?
Different sectors reach different levels at different times, depending on what kind of projects we are getting. Power already has higher exposure norms than the rest of infrastructure—probably double in many banks—because power projects are larger and the investment required is far bigger.
Restructuring loans seems to be brewing almost as a norm, what is your experience in this?
The number of accounts getting restructured has increased dramatically in the last 6-10 months. There are various issues. The cash flow has slowed down, no new projects are coming. Project people who want to raise equity are finding it difficult and because of the depreciation of the rupee, the dollar cost has gone up by 13-14 per cent, and this is an important component. In power, for example, imported coal is not able to pass through and the electricity boards are not paying the clients so it has slowed down.
In fact, 30 per cent of your finance in infrastructure is towards power projects. But because of both domestic linkage issues and export duties in some countries, coal availability will be affected. Secondly, with SEBs’ poor health, what is your forecast of power sector financing this year?
I will not be able to forecast. It depends on what kind of projects are coming up.
But you have yourself given some recommendations on how SEBs can make the distribution more viable…
We are working with Government of India on various committees to suggest various means.
How would you ask the Boards to project the revenues in their books for better bankability?
I would not like to go in detail about what they should do; we can only suggest through the government. No working suggestions can be given. As a lender, I cannot tell SEBs how to run their business. I can only lend if their cash flow is comfortable and certain.
With power purchase agreements (PPAs), the assumption was that the cash flow is going to be great. Do you see privatisation playing a factor in this in the future?
It could well be because generation and transmission is privatised to some extent, and cities are also privatising their distribution.
Have those done well, though?
Private players will not enter the fray unless they know they can do well. Regulatory issues are there: When are they allowed to raise tariffs, are they market reÂlated, are they taking too much profit? These are the factors. So basically, we need a regulatory atmosphere that reacts faster to the changing environment. The enviÂronÂÂment does not stand still, and we need a regulatory environÂment that is not way behind those changes.
Is that the problem right now?
What is your opinion?
I am asking for yours.
It is absolutely clear: coal prices have gone up by so much, the pricing by SEBs, the amount of free power they are giving, all these issues need to come up.
What are your plans to finance SEBs in the near future?
We will finance SEBs provided looking at their cash flows. If they have enough reforms and the cash flow is comfortable, we have no issues in financing.
Your advisory has also been working with some states in order to suggest or recommend?
SBI Capital Markets resolves advisory work and have mandates from various teams. They also work for the ministry.
What is the single biggest post-investment risk that banks face in India with special reference to infrastructure?
One is of course whether approvals, including land acquisition, etc, are given in time, the company is able to fulfil the requirements, and the regulators are able to acquire those things and close the issue. Then the question of whether the variable cost will pass through. Then there is inflation-adjusted return—whether the revenue will go up to that level. Basically, infrastructure requires a fixed rate regime, which requires a long term bond market which we do not have. If you borrow from the bank it is floaÂting rate interest rate. So when the interest rate goes up, borrowers get into trouble because normally it is 75-25 debt equity. So the interest comÂponent for infrastructure projects is very high because returns are extremely senÂsitive to it because interest cost is much higher in infrastÂructure projects than normal projects. This can be sealed only by long term fixed bond market—banks cannot lend at fixed rates.
Are these part of the recommendations you have given the government at various stages?
We are basically working on specific electricity boards and how to improve PPP projects, etc.
In your opinion has PPP been as successful as you had envisaged?
I think India is doing extremely well. Most of the roads have come up in PPP, ports are coming up, solar power projects are coming up. India’s PPP regulatory environment has been quite good.
Is there any limitation to PPP that you see where the government should draw a line?
There are specific political and economic reasons, where people may be resistant to tolling, for example. If you do social development ultimately not everything can be done under PPP.
International rating agencies have downgraded Indian banks recently, and foreign investors look at India as a risky proposition. In your opinion, does this nation have enough experience in infrastructure to be called stable and low-risk?
They are looking at India as risky because they say they are not clear about regulatory environments, they are not clear about land issues, they are saying that many of them look for capital markets, ease of entry and exit—which is not possible, and inflation.
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