Power Finance Corp, which has loan assets of over Rs 1.6 lakh crore, has said that having management control in a bank would help in bolstering its payment security mechanism by lowering dependence on third party bankers.

The state-owned entity, that primarily lends to the power sector, is looking to buy stake in a public sector bank. The proposal has already been send to the Power Ministry.

At present, PFC’s escrow accounts are managed by third party bankers.

“My asset book is about Rs 1,60,000 crore today. In next three years, we may be doubling that to over Rs 3,00,000 crore. So, that time my internal feeling is dependence on a third-party banker may not be so much appropriate.

“It is better to have that account in a bank in which we have management control,” PFC Chairman and Managing Director Satnam Singh recently told investors.

He noted further that the company enters into a formal legal binding contract and the bank could be sued if the latter “connives with the party and does not pay to us“.

“We have Reserve Bank of India; we can complain to them but why head into that, if I can cement that through a bank in which I also have a stake,” Singh is quoted as saying in the transcript of company’s investors’ conference held on May 30.

To ensure payment security mechanism while lending to state and central sector projects, PFC enters into a tripartite escrow account — an agreement between respective power utility, the company and their main collection banker.

This account is maintained with a third-party banker.

In the case of loans for private projects, PFC has trust and retention account. This is also managed by a third party banker where entire money is collected together.

“But our feeling is that in both these cases of payment security mechanism, we are dependent on third—party banker and therefore if the developer and the banker connive, we may face difficulty,” Singh said at the conference.

In such a scenario, Singh said, the company could go for breach of contract “but that does not sort of fortify our payment security mechanism“.

“...with a view to ensuring that if we get a stake in one of the banks, we will transfer all these accounts in that bank where we also have a role in the management, maybe a board membership or something like that, so that will cement our payment security mechanism,” he noted.

PFC’s loan assets book rose to Rs 1,60,367 crore in the last financial year.

For the full fiscal ended March 2013, the company’s profit after tax climbed 46 per cent to Rs 4,420 crore. In 2011-12, it was at Rs 3,302 crore.

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