Even as concerns mount on the burgeoning stressed assets of banks and the slackening investment cycle, Atul Joshi, MD & CEO, India Ratings & Research, has a refreshingly optimistic take on these issues. He thinks the government is making the right moves, and given time, a lot of the current issues could be satisfactorily resolved. Edited excerpts from an interview:

Do you see any easing in the debt burden of Indian companies, of late?

At the moment, there is no sign of debt reduction. But debt accumulation has stopped over the last two years. So debt to EBITDA ratio, which was about 2.7 times in 2011, is now at about 4.5 times. But we don’t see that deteriorating any further.

The deterrent is that the issuances of equity or the injection of promoter equity is not happening at an acceptable pace. We are still at least two quarters away from an absolutely assured sign that companies are beginning to recover on the profitability front. As far as the investments are concerned, we think it will take at least one-and-a-half years.

Are there any signs that the government is actually investing? Is government the only resort we have?

It is the main resort, because, for one, we know that companies are stuck. Second, we know that banks have their own inability to disburse beyond a certain point, given the capital constraints.

As far as concrete action goes, the government has created structures and an environment in which they can actually invest. If you look at railways, for instance, for coal evacuation, they are setting up special purpose vehicles (SPVs) where Coal India will hold 64 per cent, IRCON 26 per cent and State Governments 10 per cent.

Similarly, they are corporatising ports; Mumbai port trust and Kandla port trust have already been identified. We believe that about ₹600 crore of equity has been infused. Once these ports are corporatised, there will be another joint venture (JV) with Rail Vikas Nigam, which will work for port evacuation and distribution into the hinterlands.

The third driver of investment is, of course, the railways. Expansion of the existing metro lines and the new metros coming up in different cities can drive growth and urban development. High-speed corridors from Mumbai to Ahmedabad, Delhi to Agra, and Bengaluru to Chennai are the other good developments.

How can cost overruns be dealt with?

Cost overruns are a major deterring factor. Some projects become unviable simply because of this. But can you do away with the project?

By and large, the answer is no. The question, then, is how best they can manage it. And that’s where measures such as amending concession agreements, elongating concession periods, adjustment of the loan tenure, ability to move to the capital markets, and reduction of cost, need to be introduced.

We can also come up with ideas in terms of what other benefits the project can have.

For instance, say, the project has land, can the land price appreciation take care of the cost overruns? I don’t agree that public-private-partnership (PPP) is a bad model. We don’t realise that no other country had undertaken PPP on that large a scale.

I think we have been successful; but, where we got stuck was in the funding. We assumed that a project would take four years to construct but that it would get repaid in six years, which was impossible.

Had we got a 25-year loan I think we would have written a very different history for the PPP programmes.

It is only now that the 5/25 scheme has been introduced. Let’s see how it takes off.

So, what is the way out of the NPA problem?

There are three components to non-performing assets (NPAs). The first is the cyclical industries — steel, cement, paint, auto, auto components, textiles, and so on. They will fall and recover with the GDP.

In the last 15 years, on an average, banks have recovered around 80 to 85 per cent from such restructured manufacturing loans. So, that part is under control.

The second risk is from very large exposures. If that single company goes bad, the bank takes a huge knock on net worth and capital adequacy.

This part is the largest risk. We highlighted this to the Reserve Bank in August 2011. Our parameter was that if the top 20 borrowers — not the groups — as a percentage of equity crosses 200 per cent, then that’s a risk, which banks should try and minimise.

We’ve seen a huge improvement across PSU and private sector banks — from almost 450 percentage earlier, the median percentage has fallen to about 300 now.

The third piece is within infrastructure. The significant portion of the lending is in roads and mega power projects.

Now, when you look at these large projects, whether road or power, they cannot be replaced.

Across the country and across developers, the quality of the roads is good.

Demand is growing. So, the question is, how to tide over this difficult economic period. The promoter or developer can be replaced. Or the NHAI can infuse funds. Several projects have been stuck because the government has not handed over land, tolling has not started for some, annuity payments from the NHAI have not come in time.

So, if the problems are addressed will the asset be able to pay back the loan over the next 15 years, even if not seven years?

I think more than 99 per cent would be able to pay it back. And hence, should we make so much noise on banks’ NPAs on the infrastructure front?

Are there any SEBs that have shown improvement since the launch of the Centre’s Financial Restructuring Plan in 2012?

That programme has been halted. I think the new government thinks that tariff increase is not the only solution. If we ensure collections, transmission efficiency, cost reduction programmes, and operational efficiency, SEBs can turn around even at the existing tariff levels. The point that we are missing is that 85 per cent of the losses come from only six States.

If we address the issues in these six States, we can solve the power problems. What we need is a strategy to initiate dialogue between the Centre and the six States. The problem lies in distribution. Some of the ultra mega power projects (UMPPs) are struggling with low load factors. Do we really need so many UMPPs?

There are a lot of small power projects that have been set up for captive purposes with some additional capacity, which are not finding takers and are non-operational. If you add up these idle capacities, it’s a good 15,000-25,000 MW.

So, power NPAs will take a longer time to resolve. The power sector may need one more round of restructuring until the distribution issues are addressed.

So, how can the distribution problems be resolved in the near term?

The bid document says that you cannot pass on the forex risk. Now, if the government continues to back this, there is no way the company can match the costs.

The government needs to ensure that at least the forex risk is addressed, or is taken out of the equation by simply ensuring that domestic coal is supplied in sufficient quantity.

Once that is addressed, a lot of the risk gets mitigated.

Then it is the operational efficiency that would matter at the transmission company’s level. I think there will be a lot more stability then in terms of costs and their ability to negotiate a power purchase agreement (PPA) on a fixed rate basis.

What about the fact that the power companies bid for tariffs that would not allow complete pass-through of costs?

This is something the government needs to negotiate with the power utilities. There is no reason to bid at that level.

If the companies are convinced that it is the right level, then the government needs to ensure that there is some kind of penalty in terms of restricting them from bidding for other projects even in other sectors, or asking them to bring in equity, or take a haircut. The government needs to play a very judicious role and not just pass on the tariff increases that are asked for.

As told to Lokeshwarri SK, Bhavana Acharya and Maulik Madhu

Related Topics