Wary of external risks to projects, Banks may hike infrastructure funding rates

MUMBAI: Overleveraged balance sheet of companies and rise in external risk to projects such as corporate espionage cases and delays in approval for projects and commercial auctions could make bank loans to infrastructure companies expensive, even as the government tries to promote investments in big-ticket projects.
Banks are reviewing their loan covenants to facilitate change of management in case of default by a promoter and to protect themselves from external risks.

“Banks would re-price longterm loans for average low-rated companies from infrastructure, steel and iron sectors,” said CVR Rajendran, chairman and MD at Andhra Bank. “We are insisting on higher pledges from promoters in case of any additional exposures.

Lenders have turned cautious about lending,” he said. Currently, interest rates on infrastructure loans are in the range of 11.5%-12.5%. Arundhati Bhattacharya, chairman, SBI , had said, “The NPA problem continues to be there and NPA is aging, so we need capital for provisioning.

This would reduce our ability to pass on interest rate benefits to companies.” Bad loans for public sector banks, which are the main lenders to infra projects, were at their peak in September at 12.9% of total loans, RBI data showed.

For private sector banks, this was 4.4%. The recent case of corporate espionage that revealed links between ministry executives, consultants and private sector executives has got bankers worried. The case relates primarily to sensitive files being physically stolen. Recently, the Delhi Police quizzed a senior GMR Energy official in the case.

“Banks are vulnerable to external risks,” said the corporate banking head of a private sector bank. “We are closely monitoring the developments and hope no senior officials or promoters are arrested. We will reappraise all our loan agreements for companies affected by such events and those who win coal blocks in the ongoing auction once there is more clarity,’’ the person said.

Banks are sitting on restructured loans of Rs 2.72 lakh crore as of end-December 2014. They could see as much as 35% to 40% of this becoming non-performing. The infra sector is the biggest worry as an expected economic turnaround has yet to take a clear shape, leaving projects such as building of power plants and highways stuck.

ASC ruling last September cancelling more than 200 licences given for captive coal mining has affected many projects, especially power plants that were to use coal from these mines. The government has started the auction process. The first round has seen aggressive bidding at very high prices, rendering most allocation non-remunerative, which analysts say could affect the financial viability of power projects.

The government has put on hold the allocation of four coal blocks bagged by Jindal Steel and Power, Bharat Aluminium and BS Ispat, which has also left bankers wary. “In power, you have two issues — one on the supply, which is fuel linkage, and one on the off-take side, which is the tariff structure,’’ said Romesh Sobti, MD & CEO at IndusInd Bank. “Both went into a tizzy because the fuel-side cost went up and companies had to import and the tariff signed on the PPA was unviable. That’s the reason why people made applications to raise rates,” he said.

“Banks that would finance now would want certainty on both sides on the fuel linkage side and certainty on the ability to pass through any unforeseen structure that impacts my tariff structure. The pass through side is not clean and I expect banks will wait for some clarity on this also,” said Sobti.

The RBI has also been prodding corporates to maintain financial discipline to enjoy lower interest rates. Governor Raghuram Rajan, in a media interaction recently, had said, “The immense risk premium that is being demanded of some corporate houses is because of the state of their leverage, because of the risks they have taken, and because of their inability or unwillingness to repay.” The government and the RBI have been pitching for a strong bankruptcy law to ensure banks can take action against rogue and wilful borrowers. “If bankers cannot get their money back, they are not going to give you loans at cheap rates,” Rajan had said.

RGurumurthy, head, corporate and institutional banking, at RBL Bank, said, “With the recovery mechanism in the country taking shape banks would want to ensure that the loan agreements give them the ability to take over assets and change managements in case of default.”