The Indian Railways’ borrowing arm, the Indian Railway Finance Corporation (IRFC), successfully closed its tax-free issue recently. In an interview with Disha Kanwar and Jyoti Mukul, Managing Director Rajiv Datt says there is no stress on railway finances owing to IRFC funding, even as the organisation is cautious about moving to project financing.
Edited excerpts:
Given the success of your issue, how would you perceive the current market conditions?
Our issue did exceedingly well. Except for the retail bucket, our institutional and HNI [high net worth individual] buckets were over-subscribed on the first day itself. Our issue closed a week before the planned completion date, that is, February 10. Though our issue size was just Rs 6,300 crore (Rs 3,000 crore, with an option to retain over-subscription up to Rs 6,300 crore), there was a subscription of around Rs 18,000 crore. Investors perceived our issue and those of other government agencies as quasi-government issues. Tax-free issues of this amount have come after a long time. These issues are very secure and interest rates on them are quite attractive. The response has been good even from small retailers, especially from people who have been looking for secured investments and tax-free streams.
Coming to the larger issue of railways’ fund-raising, how much money has been raised for the current financial year?
The original target mandated by the railways ministry was Rs 20,595 crore. This has been brought down to Rs 14,800 crore. Including the public issue of bonds, we will be transferring Rs 14,800 crore to the Railways. Of the Rs 14,800, the contribution from overseas is about Rs 960 crore (from the European Central Bank), taxable bonds is Rs 4,385 crore, term loan is Rs 2,000 crore and tax- free bonds is Rs 7,000 crore. The remaining amount has been raised from IRFC’s internal accruals.
Is the Railways heavily dependent on borrowings?
IRFC funding has added value to the Indian Railways. The annual borrowing target has gone up consistently from around Rs 2,500 crore in 2002-03 to Rs 14,800 crore in 2011-12. Funds provided by IRFC have been utilised for the acquisition of rolling stock assets. The share of rolling stock assets funded by IRFC as a percentage of the total rolling stock assets in operation has gone up from 36-37 per cent in 1999-2000 to about 60 per cent currently. However, lease rentals that the Railways pays us on that financing has gone down from 7.5 per cent to less than six per cent of GTR [gross traffic receipts]. Assets’ financing is going up but lease rentals paid as a percentage of GTR is coming down. Thus, these assets have been yielding significant returns for the Railways and it has, in turn, been comfortably paying us the lease rentals. There is no stress on the Railways’ finances because of IRFC funding.
How far do you plan to go in financing areas other than rolling stock?
This year, we had been assigned the additional task of funding select capacity enhancement work apart from the usual rolling-stock financing. The Railways has been careful enough. It is identifying projects that are nearing completion to be funded by IRFC. Only last-mile funding arrangements are taken care of. The amount of money given out for capacity enhancement work that will be ready in the next one or two years is relatively small. From the tax-free borrowings, a small part of the money will go for projects. Out of Rs 14,800 crore, about Rs 12,000 crore will go towards funding rolling stock.
In case of leasing rolling stock assets, lease rental is not linked to every unit of IRFC-funded rolling stock, but to the total rolling stock assets funded during the year, which is given out from the total pool of Railways revenues. We are formulating a similar model for funding railway projects. Our view is that we should not go into project financing. We are more comfortable in financing rolling stock.
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Why is the percentage of overseas borrowing so low? How would you compare it with domestic markets in which interest rates are quite high?
Last year, we had a target of $500 million. We raised around $200 million (less than Rs 1,000 crore) at that time through a Syndicated Foreign Currency Loan. We had planned a bond issue, but at the time of pricing, the euro crisis occurred and markets went haywire. The price that we had internally set for ourselves was not available and the price being offered was much higher. We have permission from the RBI [Reserve Bank of India]. The issue is still open and we are waiting for an opportune moment. As soon markets stabilise and the pricing nears our target level, we will consider accessing the market.
Borrowing from external markets exposes us to financial risks like interest rate risk owing to variation in Libor or US Treasuries and currency risks. There is not much pricing advantage compared to domestic markets. By and large, we have managed to ensure that international borrowings are around two per cent lower than domestic borrowings, thus, lowering the weighted average cost of borrowings.
Do you see any impact on borrowing costs owing to the recent cash reserve ratio (CRR) cut?
We have already raised money for this year. The borrowing cost has moved up from 80 basis points to 100 basis points. But in the next financial year, we feel that it will moderate. The CRR cut has injected liquidity into the system and government securities’ rates have started coming down. There is talk among bankers of a rate cut after the Budget and liquidity easing. So, it all depends on the Budget and RBI’s next policy move due next April.
Is 95 per cent operating ratio of the Railways an area of concern when IRFC goes to the market to raise money?
A strong financial base, profitability track-records, highest quality of receivables (receivables arising directly from the sovereign) and the highest possible rating from domestic credit rating agencies and the rating being on a par with sovereign from international credit rating agencies has enabled the company to borrow from domestic and international financial markets at the most competitive rates and terms.
Moreover, the Indian Railways is operated by the railways ministry. Lease rentals payment to IRFC forms part of the Railway Budget that is presented to and voted by Parliament. However, the operating ratio of the Railways had deteriorated for a host of reasons like the implementation of pay revision and so on and is expected to improve.