The stock of Srei Infrastructure Finance (Srei Infra) gained 9 per cent in the last two trading sessions after it was awarded the ‘infrastructure financing status'(IFC) by the RBI. Srei Infra, a non-banking finance company (NBFC) which predominantly caters to the financing needs of infrastructure and infrastructure equipment, may see a decline in its borrowing cost and a consequent margin expansion. The benefit would be available from next fiscal, coming at a time when interest costs have been rising. The infrastructure status will also diversify the borrowing universe for the company.
The company's stock was beaten down over the last four months due to significant rise in the interest cost (the stock lost 47 per cent since November 2010).
SREI Infra would now enjoy a borrowing status similar to that of companies such as PFC, REC, IDFC and would now be allowed to raise 80CCF tax exempt bonds from retail investors at lower costs. It would also be able to partly raise external commercial borrowings through the automatic route (RBI approval not required).
These options may help reduce cost of borrowings for three reasons:
One, as the IFCs are allowed to raise retail tax-free bonds, the borrowing costs will come down significantly. At current yields, the savings through the retail tax bond route may be a little over 2 percentage points.
Two, the current cost of ECBs, even after taking into account the hedging costs, is lower than the domestic rates. These two sources of long-term fund raising will diversify the borrowing base of the company. Currently, bank funding accounts for 61 per cent of the total borrowing of Srei Infra and its equipment-financing arm.
Additionally, the new borrowing routes which will be available are also long-term (more than five years) and would help reduce the asset-liability mismatch for Srei Infra.
Third, the cost of borrowing of loans raised from banks may also come down. The current risk-weights for non-deposit-taking NBFCs are 100 per cent. This will come down to 30 per cent for a credit rating of AA (Srei's current credit rating) for an IFC.
Banks are also allowed to increase their exposure to infrastructure financing companies.