India Infrastructure Finance Company Ltd (IIFCL) may not see a paradigm shift because it was recently bestowed the NBFC status. Yet the company now hopes that regulation will help define its processes and growth better, Harsh Kr Bhanwala, Executive Director, IIFCL, tells Shashidhar an undaiah.
IIFCL has recently been recognised as an NBFC, and capital adequacy norms have been reduced for you to 12 per cent. What are the implications for you? The capital adequacy norms have reduced considering the nature of business we are in. If we were an NBFC in any other activity, RBI would not have agreed to reduction. We have committed 80 per cent of our lending to PPP. Most of PPP projects have buyback arrangement and they are relatively safe. The undertaking is that if there is a breach, most of it would be made good by the statutory authority. Our capital adequacy now is close to 17 per cent. It is good that as our balance sheet size is growing, we now will be regulated by RBI. On a consolidated basis our balance sheet is almost Rs 46,000 crore, so we cannot be out of purview of a regulator.
What has changed for you? Since we had voluntarily decided to follow the [regulator´s] norms even before the NBFC status, regulation may not have any impact on the outcomes at present but processes would get better defined. We updated our KYC and governance policies and we will have a department dedicated which will be catering to offsite supervisory requirement of RBI. Overall, in terms of quality of manpower and in terms of the outcomes and target achievements, we don´t see much of a change by regulation.
Will your plans fall under RBI´s purview? RBI has not asked us to follow any targets as of now. We have our own five-year plan and we have conveyed it at the time of registration to RBI. Growth primarily comes from within the institution since we do not lend to what is a defined ´priority sector´. Except for the past year, infrastructure lending has been the highest.
So this year impacted you adversely, adding pressure? Infrastructure lending is complex, with phase-wise disbursements over 3-4 years. So our lending will be affected not this year (since we have committed to these disbursements 3-4 years ago), but may be in future years.
Till then every organization is finding its own ways to deal with it. Banks have diversified lending, so they can afford to go for diversified disbursements. For us the challenge is a little different because we are in infrastructure space alone. We will now lend to sectors with no slowdown, such as renewable energy reorienting our focus from thermal power this year towards wind and solar, and urban infrastructure. Further, now the focus is on our Takeout Finance Scheme and Refinance Scheme.
What is the proportion of projects that you reject for takeout? Fairly high. This years fairly high. Roughly around 50 per cent.
That means 50 per cent projects or more have taken off but are not progressing in a satisfactory manner? No. I will not say that entire thing is the project´s [failure]. We have defined exposure limits, so it could be partly because of our own limitations.
What is your biggest concern in urban infrastructure projects? In urban metro rail projects, land acquisition would be the biggest concern. We are all now very careful and so are banks. Further capacity in Urban Local Bodies in project development and project management is rather low. We insist on 100 per cent land acquisition.
Are you more careful because of [private players´ pullout] in NHAI projects recently? Media reports say you would be the exclusive lender to roads so how will you address those issues? We are not an exclusive lender. We lend in consortium only. That news was primarily on account of the fact that we have taken the lead to offer a longer repayment period for our take-out projects.
Will you get involved at a pre-bid stage for later refinancing or take-out? Yes, but not for all projects, but in a qualified manner for those which will meet the financial criteria defined by us.
How did your net profit halve itself this half year? Our operational income has increased significantly in the first half of this year, however, bottom line is affected due to following reasons:. First, last year we had a dividend income of Rs 166 crore from our UK subsidiary. So that was an exceptional event last year and payment of dividend is not a regular yearly event from IIFC (UK). Second, this year, we had to increase provisioning for restructured accounts (even ´standard´ ones), due to recent revision in RBI norms. This meant an additional Rs 80 crore. Third, some of our borrowings from multilaterals were not hedged. That was reasonable to some extent as we are a long term borrower but was prone to a bit of risk. So we decided to provide for that also. These measures strengthen the balance sheet.
You are now in process of raising tax free bonds. In this environment, what is your expectation? We will complete our target. Indications are robust.
With your focus on renewable energy, what strategies have you envisioned to meet your target? In our focus on renewable energy, we are trying to cover more of operational projects under solar and wind segments, which can be covered under our take-out scheme, where interest rates are transparent and non-discretionary, and are reasonable as compared to market rates. We are likely to hold a special meeting with developers of wind and solar segments to apprise them of our credit facilities. We are also in dialogue with IREDA for co-finance options with them.
How do you see the restructuring saga playing out? Is it petering out? As a measure, restructuring will always continue to exist. We have seen that it moves in cycles. When you lend aggressively, sometimes you are a little oblivious of some inherent risks. Then you are in introspective phase. Restructuring is like any other financing activity. It is a measure adopted to cater to a typical situation aimed at restoring health of project or institution. I will not say that health will not recuperate, and it would be illogical to think that health of certain projects can definitely improve. Measures need to be commensurate for example, if you were to commit to restructuring once, why don´t you do for a longer period if you feel that problem will not be resolved in the short run, so that an NPA is avoided. We should try to overcome the real problem affecting the health of the project rather than just extending the repayment period.
If it is irresolvable, you need to exercise other options available within the legal and regulatory framework.
Because it lends mostly to PPP projects, IIFCL enjoys a relatively clean balance sheet, with less than 1 per cent NPA. Started in 2006 with a capital of Rs 10 crore, the company now, on a consolidated basis, has a balance sheet of nearly Rs 46,000 crore. Yet IIFCL is still a relatively small player in infrastructure finance. This year´s target is Rs 9,500 crore, of which about Rs 4,000 crore has been disbursed. But with projects coming of age, IIFCL´s status as a secondary lender will gain momentum. IIFCL will declare two tranches of its tax-free bonds of Rs 5,800 crore.