We would like to continue infrastructure lending by cherry-picking good and viable projects promoted by parties with proven track records, says HS Upendra Kamath, Chairman and Managing Director, Vijaya Bank, in an interview with Sumantra Das.
What has been your experience lending to infrastructure sectors?
Lending to infrastructure is very important from the point of view of nation building and creating grounds for all round economic development. Banks play a vital role in this as lenders. Our bank's total outstanding exposure to infrastructure (as per the revised definition) as of end-December 2012 was Rs 19,701 crore, which is approximately 30 per cent of the total loan book. Our bank's experience in lending to infrastructure sector is almost akin to lending to other sectors. From the point of view of delinquencies, the infrastructure portfolio of our bank has a Non-Performing Asset (NPA) level of Rs 160 crore as of end-December 2012, which is less than one per cent of the sectoral outstanding. However, infrastructure project financing involves certain pain points, which are common to all lenders. They include, cost overrun, time overrun, delay in government clearances and approvals, delay in various tie-up arrangements like coal procurement, power purchase agreements, financial tie up, delay in project completion and resultant Commencement of Operation Date (COD) issues and regulatory guidelines on this. Due to this, there will always be some instances of delay in generating revenues by the companies financed by the bank. However, let me hasten to add here that lending to infrastructure sector is a recent phenomenon and as it is a well known fact that most of the infrastructure projects are of long term in nature, many of them are in incubation stage. Therefore, it would not be an exaggeration to state that this portfolio is relatively untested to pass an authentic comment or judgement on the experience of financing this sector. Even the low level of delinquencies is not a right indicator of the quality of asset in infrastructure finance at this point in time as many relative guidelines are tweaked in favour of this sector by way of liberal forbearance.
Which sectors have performed well from a bank's perspective? What is the current exposure of your bank to the power and road sectors?
Out of the sectors from infrastructure, I feel that the education, hospitality and ports have been relatively tested and found to be performing reasonably well. The performance of road sector is to be seen further. Our bank's outstanding exposure to power sector as on 31 December 2012 was Rs 14,236 crore. This covers power generation (Rs 6,761 crore), power transmission (Rs 1,604 crore) and power distribution (Rs 5,871 crore). Under the category of roads, highways, ports and airports, we have an exposure of Rs 2,918 crore as on 31 December 2012.
Will your NPAs be lower in the second half as compared to the incremental NPAs in the first half?
Under NPA management, our bank has performed reasonably well in the current fiscal till now. We started the current fiscal with an opening NPA stock of Rs 1,718 crore as on 1 April 2012 and could bring it down to Rs 1,693 crore at the end of Q1 June 2012, which is a good achievement. However, due to sudden and unexpected addition of certain major accounts, mainly in the eastern sector branches, our NPA figure got distorted in the next quarter resulting in swelling of the NPA portfolio to Rs 1,896 crore as at the end of Q2 September 2012. However, we have bounced back again by containing the NPA level to Rs 1,889 crore at the end of Q3 December 2012. As our bank has standard stabilised system generated NPA identification system, we can't help fresh additions taking place automatically as per the norms although, we make all out efforts to recover the arrears and to ensure that the account does not slip. As a result, we may find that the fresh additions are always substantial. For example, on a cumulative basis, we had added Rs 1,340 crore during the current fiscal to NPA up to December 2012. However, we have a robust follow up and recovery mechanism in the bank and we immediately target the fresh additions for immediate recovery and upgradation. During the above period, we could recover a sum of Rs 268 crore and upgrade a sum of Rs 682 crore. We have also prudentially written off NPAs. Even in prudentially written off cases our recovery efforts continue unabated. Going forward, it is our ambition to keep the level of NPA at least below that of March 2012 and we are working on this. We have dedicated teams at all regional offices. We have a robust and highly flexible recovery and compromise policy. We have also launched "Raitha Bandhu" scheme for settlement of long outstanding agriculture loan accounts and thus are hopeful of considerable reduction in the levels of NPA by the year end.
How much are you expecting by way of recoveries, in the current quarter?
Our performance for the previous three quarters show that the recoveries in NPA resulting in reduction of the levels are in the range of Rs 80 to 90 crore. However, considering the increased efforts put in by us with special emphasis on reducing the NPA levels, we are hopeful of the cash recovery crossing Rs 100 crore for the last quarter. Besides, upgradations are also likely to be higher in Q4 of FY 13.
What are your plans for lending to infrastructure next fiscal? Will there be any change from the past years? Which are the infra verticals that you see more prospects in the coming years?
Based on sound risk management practices, we have Sectoral Exposure Caps for financing various sectors including infrastructure. Right now, the bank is in the comfort zone as our exposure under infrastructure lending under all sectors is well within the prescribed Bank's Internal Sectoral Caps fixed for them. Even the overall exposure to infrastructure lending is 32.12 per cent of Aggregate Credit, which is within the stipulated cap of 40 per cent. So, against this backdrop, we would like to continue infrastructure lending by cherry-picking good and viable projects promoted by parties with proven track records. Since we have substantial exposure to energy sector, mainly for Discoms, we will try to avoid exposure in the thermal power projects and Discoms. In other energy segments like hydel, solar and wind, we will take exposures selectively. I foresee huge opportunity in lending to infrastructure for quick growth as it will see beneficial effect on other ancillary sectors. However, bankers should also be careful in handling the challenges of assets and liabilities mismatch as most of the infra projects are of long term tenure of more than 10 years. So, option of take out financing needs to be constantly explored. As I already said, infra projects in education, hospitality and ports have great potential for growth.
Are we lacking somewhere on long term vision on infrastructure investment? What has been your experience?
No. I do not think that we are lacking in long term vision in infrastructure investment. Every proposal received by us is vetted for its overall viability and all the risks associated with it are duly factored in pricing. As I explained earlier, considering the sound risk management principles, we work within the prescribed exposure caps. Within this purview, we have our own plans for infrastructure investment. Our experience is not totally different from that of other players in the market. The problems associated with restructuring and resultant burden on profitability due to provision in diminution value are common for all lenders in financial sectors. So, we too sail with the current. On the macro level, I am of the firm view that the government and RBI have a definite long term vision supported by concrete action plan, which is visible through various policies of them. The recent change and enlargement of definition of infrastructure is a valid example, which emphasises the desire of the government to bring more sectors under infrastructure. Creating and supporting India Infrastructure Finance Corporation is yet another major development in this initiative. We need more specialised infrastructure funding institutions. Government/RBI should enable commercial banks to raise long term funds through tax efficient bonds. Similarly, access to ECB is to be given to infra sectors in a much bigger way. Efficient securitisation market (Post COD) is to be developed. These long term measures will help the infrastructure segment.
How far global economic scenario affected Indian infrastructure sector (finance part)?
It is a well known fact that the global economic scenario is not very healthy, although there is no complete gloom right now. Recovery has been taking place albeit with slow pushes but we cannot claim to have sighted light at the end of tunnel as it may take some time for a complete boom. In a relatively globally exposed economy like ours, the effects are there for all to see. The IIP and GDP growth levels are still a cause of concern as we have failed to repeat the performance of nearly 9 per cent GDP growth now. All these will have adverse bearing on banks' financing to infrastructure as in case of other sectors also. The delay in generation of revenues and consequent requests for restructuring will have cascading effect on the banks' profitability, which will in turn affect the decisions of bankers for taking up further exposure.
How will you describe Corporate Debt Restructuring (CDR), it seems as norm for most of the infra companies in India? Is this normal?
We cannot come to such a hasty conclusion and paint everybody with the same brush. Although, recently we have noticed the trend of many companies, mainly the infra companies rushing to CDR route, which gives a notion that it has become a norm, the reasons cannot be overlooked easily. As I have already explained earlier, several factors affect the revenue generating capacity of companies and some of them are beyond their control. Unfortunately, in case of infra companies, such factors are large in number. However, it is not correct to associate CDR with infra projects as a norm. In fact, reference to CDR in case of infra projects sometimes may not serve the proper purpose as the main issue like COD and interest rate concession are already well addressed and factored in as far as infra projects are concerned in view of their applicable guidelines. CDR has large number of cases pertaining to iron and steel, textiles and other sectors and infra project is only a part of it. The Discoms, which are the favoured entities for banks only a few years ago due to their state government backed status, have lost their sheen in view of change in the norms of asset classification and provisioning. Further, driven by political compulsions governing their operations, they too have not adopted sound market driven business principles. All these factors have contributed to increase in cases of financial restructuring plan by them. CDR route is no doubt a viable option in genuine cases, when viability of the project is in doubt it serves no purpose. CDR forum has to ensure that genuinely needed and viable cases are entertained.
There is a general feeling that we have not seen the worst yet. How deep is the stress, as far as the banking sector is concerned?
In my personal view, Indian banking system has seen many challenges and turbulence over a period of time and has emerged stronger with each testing time. We have adopted more strongly to the changing environments, whether it is the banking sector reforms, structural changes, privatisation, globalisation, prudential norms and BASEL guidelines. Banks in India, especially the public sector banks, are also vested with social responsibilities. Thus, while adopting to the international best practices and norms, we have to perform our role of spreading financial literacy and financial inclusion also. However, the very fact that while many financial institutions of the west collapsing despite having many best norms and practices, Indian banking system still facing these challenges and coming out successfully speaks volumes about its soundness and resilience. So, I do not feel that the stress, which is visible today on account of the economic factors, will be overcome in the next two or three quarters provided reform process accelerates, clearances are given promptly and overall investment climate improves for the better.
Do you think allowing licences to new entrants will boost infrastructure financing?
It all depends on the policies and programmes these new entities adopt and priorities they have. Since these new entities coming up will be in private sector, the profitability aspect plays an important role in their entire decision making. Being well aware of the pain points associated with infrastructure lending and the financial implications involved, it is interesting to see how they approach this opportunity, what will be their terms, etc.
Which are the major issues do you think major concerns or should get first priority for infra finance?
First and foremost concern in case of infra financing is the cost/project overrun, which distorts entire financial planning of the borrower and lender. So, we should have sound practices for time bound clearances and approvals in place. Further, uncertainties in arranging tie up and procurement/distribution channels should be removed so that the viability of the venture will not be in doubt. Technical and managerial acumen will be another aspect, which the lenders are keenly looking at but, I think, our country has made substantial progress in this area. Long term fund raising is to be made possible and lasting.
Please tell us about the retail plans. How are you planning to increase your presence in India?
Retail has been and will continue to be our focus area. We have taken great strides in improving our retail portfolio and the results are apparent. There has been a conscious shift in our approach from bulk advances to retail advances in view of the benefits associated with it. The year-on-year growth in retail lending has crossed 17 per cent during the just concluded quarter. All verticals of retail lending like housing, vehicle, trade and personal finances are showing impressive growths as well. We have launched many new products to cater to different segments of society besides remodelling some existing schemes to make them more competitive and market friendly. Going forward, we are optimistic of further scaling up our performance and reach higher levels. We do have a pan India presence and thus could easily market products across the country.