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The Supreme Court verdict deallocating coal mines and its curbs on operating iron ore mines have not only put power and steel companies in a bind, but also banks. The lenders are a worried lot as loans for infrastructure development, including power and roads, form the lion's share of "stressed assets" that sit on their balance sheets.
Given the moribund state of the power sector and the number of stalled projects, the past few weeks have seen efforts to find solutions to the problem. One possibility is a Rs 60,000-crore power sector fund, with state-owned power companies contributing 49 per cent of the financing and the rest coming from banks and foreign investors. Another option, as proposed by the Association of Power Producers to Reserve Bank of India Governor Raghuram Rajan, is allowing banks a 10 per cent exposure to power projects beyond the current ceiling.
Both are driven by the object of getting things moving. But a major portion of the burden to salvage the situation seems to be falling on the financial sector. Many lenders have reached the sectoral exposure ceiling. They have also hit the single client limit of 15 per cent of its capital funds and group exposure of 40 per cent. There are, therefore, risks of slippages leading to huge provisioning.
At present, banks and financial institutions lend money to the infrastructure sector for a maximum period of 15 years. In reality, projects begin to see steady cash flows only in the long term. But often, it is in the early period of a project when the returns are hardly there that the bulk of the repayment has to be made. The delays in project execution and lack of fuel linkages have complicated matters.
Pushing for solutions
One way out of the mess is a new financing structure. Under the 5/25 structure, banks may fix longer amortisation periods for loans to infrastructure projects: a 25-year credit with periodic refinancing, say every five years.
The country's largest lender, State Bank of India (SBI), has sought more flexibility in restructuring exposures to metal and power companies that have been affected by the Supreme Court verdict. Its view is that though the problem of raw material shortages could be resolved over the medium to long term, in the short term, the power and steel industry would need relief to tide over the shortages that could otherwise weaken the price outlook.
An existing project would need flexible restructuring in line with the economic life of the underlying asset, and this can be achieved through a 5/25 scheme, says SBI. Such a restructuring would enable loan repayment to be co-terminus with cash flows from the projects. It would also improve the company's debt-servicing capacity and viability of operational projects.
In the push to find answers to the sector's riddles, private power producers too met RBI Governor Rajan last week and pleaded for a 10 per cent additional debt exposure by lenders to overcome the hurdle of fuel shortages. The Association of Power Producers sought easier rules for banks to fund stranded projects. Companies hit by delays include Reliance Power, Tata Power, Jindal Power, and the Adani, GMR, GVK, Essar, Indiabulls, Lanco and Welspun groups.
Limits of banking support
Amid all this, RBI has given clear hints about the limited support that the banking sector can offer to troubled infrastructure projects. Deputy Governor M Mundra told an investors' forum last week that pinning the entire expectations of the infrastructure sector on an accommodative monetary policy and regulatory forbearance would be overlooking the obvious.
The banking system already has a high level of exposure to the sector and it cannot have an infinite appetite towards a single sector, he said, and suggested that the infrastructure sector needed multiple originators of credit as also an efficient "originate and distribute" model to leverage capacity and expertise of each player in the act.
The long-term funds available with the pension and insurance sectors could play a very critical role in funding investments in the infrastructure sector. However, there is a need to upgrade the credit appraisal and monitoring capabilities of banks, especially public sector banks, to face the challenges involved in project financing.
Earlier this month, global rating agency Moody's retained its negative outlook on India's banking system. The high leverage in the corporate sector could prevent any meaningful recovery in asset quality over the next 12-18 months, it said. India's corporate sector is highly leveraged, with a debt-to-equity ratio of more than 3.0. In particular, said Moody's, companies engaged in infrastructure projects face both structural and cyclical challenges. Without a stronger economic recovery, significant deleveraging would occur only beyond the horizon of this negative outlook.
GETTING POWER PROJECTS OFF THE GROUND
According to the Association of Power Producers, a grouping of private power companies, projects of 136,000 Mw involving a capital outlay of over Rs 620,000 crore have been affected due to various factors. Now, an expert panel headed by India Infrastructure Finance Company Chairman Santosh B Nayar has looked into their demands on ways to rescue the stressed assets and has submitted its recommendations to the Union finance ministry.
The panel has suggested that for projects stuck in court cases, the account may be allowed to continue as "standard" till a final settlement is reached. In other words, the assets should not be considered as stressed by banks if the reasons for delay in the commencement of commercial operation of a project is beyond one's control. For existing projects, delayed beyond two years, the provisioning by banks should be kept at 0.4 per cent instead of 5 per cent that is required at present.
The panel also said that all viable projects may be allowed a one-time dispensation for refinancing with an extension in the repayment tenure. Besides, in order to tackle the issue of funding of cost overruns, the lenders may be allowed to decide on the quantum of funding and revise the repayment schedule. The Reserve Bank of India may impose strict timelines for processing such overrun funding.
Among other things, the committee is in favour of refinancing of viable non-performing assets to stagger the debt repayment over a project's life. It said that any shift in the date of commencement of commercial operation and additional funding pursuant to change in management may not be construed as restructuring, provided such a dispensation is allowed only once for a project.
The committee also sounded a word of caution on loans to distribution companies. It said lenders should link any additional funding to distribution companies with implementation of a financial restructuring plan. The power ministry should come out with a policy on long-term fuel linkage for projects whose coal blocks have been cancelled. It said lenders may re-examine the viability of stranded gas projects and take up the matter for a special package only after there is sufficient clarity on the availability of additional gas.
Sudheer Pal Singh
