Will RBI successfully break the financial logjam?

The biggest headache for the country has been incomplete or underutilized power projects and non-starter road projects due to familiar problems of coal, land and environment. For the banking system, this has meant a pileup of bad loans and worse, a hesitation to lend more money to the sane groups.

The Reserve Bank of India (RBI) last month tried to breaking the financial impasse. It said in the case of loans for existing projects that had commenced production and were generating revenue, banks can take out the balance loan and refinance it as it were a fresh loan.

They can add more or different lenders and spread the loan over a longer period that is over the life of the project. At least 25 percent of the loan has to go to new lenders. But a big concession is that while so far banks gave a maximum of 15 year loans, they can now spread the balance loan over 85 percent of the life of the project or the concession period. That is for old loans.

In the case of new loans unlike the old loans that had to be no more than 15 years, banks can assess them as a 25 or 30-year loan depending on the life of the plant or concession period. However, they can treat it as a five-year loan and at the end of five years, subtract the paid off amount and resell or refinance the balance on new terms, possibly at lower rates because by then, the risky period of construction would be over.

A panel consisting Oriental Bank of Commerce's CMD SL Bansal, SBI's Former MD Diwakar Gupta and GMR Infrastructure's Group CFO Madhu Terdal discuss with CNBC-TV18's Latha Venkatesh if these two new rules will bring some relief to infrastructure builders by decreasing their load on old loans and giving them some money to finish the more recent incomplete projects thereby indicating less bad loans for banks.

Below is the verbatim transcript of the panel discussion with CNBC-TV18:

Q: The takeout financing which allows you to refinance existing projects, do you think it will be substantially availed off?

Bansal: The advantage is now when we started financing these infrastructure projects starting from 2003-04, by now, roughly one-third of the projects have achieved Cancellation of Debt (CODs) and these projects are eligible for takeout financing.

Good thing is initially we were funding these projects only for 12-14 years, now we can fund it for say if the economic life of the project is for 25 years, we can fund it for extended period of 20-21 years. This additional seven-year period that is available to such projects will ease out the cash flow and then wherever the promoters are facing headwinds and they are not in a position to complete the remaining projects, they will be quite eased and naturally, the banks will be benefitted to a large extent because they will not face the problem of immediate non-performing assets (NPAs).

Q: The issue is whether in the refinancing or takeout financing of an existing project which as you say you probably gave the loan in 2004 or 2007, will the 525 rule apply, will you really be able to extend the loan for 25? Do you think that a lot of projects will come for takeout financing if you are going to be faced with the same period?

Gupta: No, there seems to be a slight contradiction if you go by the letter how it is drafted. The spirit is that you need to give infrastructure companies a longer repayment period. That makes it easier for them to service debt, it makes cash generation for the promoters better, it also takes away stress where it may have come because lot of stress has happened due to external factors. If you go by the spirit of this then I think the rules should apply.

Now to the extent that there is a grey area on this, clarification from RBI will be in order because otherwise there would be banks that would still be constrained by asset-liability management (ALM) in giving a longer repayment period.

Q: As far as the reading of the rule is concerned, the rules released on July 15th clearly say the above structure will apply to new loans to infrastructure projects and core industries project sanctioned after the date of this circular. So a project that you have sanctioned in 2004 or in 2007 come and ask you to takeout financing, you can't given them 25 years but you can give them the economic life or the concession life of that project up to the extent of 85 percent. Let us assume you gave them a 12-year loan of which five years have been paid out, the balance seven years logically can be extended to 10 or 14 years, do you think so?

Bansal: If you read these two guidelines carefully then it means the same thing. If you have financed a project, say in 2007, which has achieved COD in 2010 and in 2007 the concessionary period allowed to the promoter was, say 20 years then from 2007 COD is achieved in 2010, it operates up to 2030. Now we are in 2014, so the remaining period of the economic life of the asset is only 16 years. If you are financing now, the economic life will be say 20 or 25 years but if you are financing in 2010, then the economic life will be reduced to that extent. So the spirit is same, meaning is same. I don't know where is the confusion.

Q: The confusion is you cannot give it as a five year loan, you will have to treat it as a full loan, I mean the 525 rule will not apply, will it?

Bansal: 525 rule is only for new projects in the sense because five year period is for achieving the COD and facing the initial hiccups. Once the five COD is achieved then this concept of five is gone. It is then a project already in place and then you read it based on the economic life of an asset. You can fix the instalment based on the economic life of an asset.

Q: You can extend the repayment upto 85 percent of the residual concession period or of the full concession period, right?

Bansal: 85 percent of the residual concession period.

Q: So you will be really in a position to give the project owner a slightly longer or a much longer repayment period, say maybe 12 or 14 years?

Bansal: Yes, absolutely right.

Q: Does that mean that even if you don't have the 525 advantage for the existing projects you are still able to give the infrastructure owner longer period?

Gupta: Certainly. You can give them a longer period for the amount that is taken out. But the additional clarification that I was referring to is that it will be that much easier for banks to do that quickly if the residual take out period can also be treated as a five year exposure for the ALM guidelines and that is the spirit, maybe Reserve Bank of India (RBI) will say that, yes, they will allow that. Logically, they should allow it.

Q: So far without making it a 525 kind of loan, a substantial number of banks will be willing to refinance this because it is a standard asset and it has started commercial production. So they will be willing to give them a longer repayment period?

Gupta: Certainly.

Q: You think banks will be willing to buyout these loans?

Gupta: Let us put it this way. This is going to be one of the enablers for the banks to look positively at a buyout. Obviously, this is not the only factor, there is the real economy. This is the financial aspect that has been addressed and as I have been talking of late in several other debates in the public sector at least there is also this aspect of appetite, so those two things have to be addressed but certainly this is an enabler in itself towards longer repayments and takeout.

Q: You already have a lot of projects in many of which commercial production has begun, do you think it will be very attractive for you to go for takeout financing and thereby increase the repayment period for these projects?

Terdal: Absolutely, for an infrastructure company like ours, this will be definitely a blessing and really come in time and companies which have many projects that have actually achieved COD and are definitely having stress of liquidity for account of variety of reasons of either the cost overrun or the time overrun. So a repayment schedule of a longer time say around 20 years or 22 years depending upon what is the life of the asset. For example, all our energy projects, they have all got into 25 years.

Q: But this will not be available for those projects where date of commencement has not been achieved or commercial production has not been achieved by the plant; those will not be refinanced through takeout financing?

Terdal: Indeed, that will be one of our requests and that is also being addressed separately. I do not know to what extent.

Q: But if that is not addressed even then because of the relief you are getting in projects where commercial production has begun do you think you will have a little more money for those older projects you will get smaller instalments over a longer period, do you get enough financial relief to complete projects where commercial production has not been achieved?

Terdal: I don't know whether it will be enough or not one has to have to really take out a case and discuss with the banks because what is intended in the circular and to what extent actually banks will really implement is an issue.

Q: Why do you fear they won't implement?

Terdal: Because this is not provided. I do not know whether this 525 rule is applicable under this.

Q: No, it is not applicable for existing projects.

Terdal: So, if that is not applicable then obviously it will be a onetime facility given to the banks.

Q: The 525 is for new projects. What I am asking you is that takeout financing is available for existing projects where commercial production has begun?

Terdal: Correct.

Q: So, won't you have a project where you started commercial production in 2010 or 2011 there you could go to your consortium of bankers and tell them to refinance it over a longer period, won't that give you financial relief?

Terdal: Let us look at some of the reasons why it is needed then we can debate. Why these are under stress; firstly, the interest rates themselves are quite high. We have to look into what is the approach banks are taking.

Secondly, because of this, there will be a cost overrun or most of the cases they must have suffered a bit of a cost overrun. Thirdly, what is the kind of additional equity requirement banks are likely to ask or may not ask. So these are the issues that will finally determine to what extent the money will be available and what is the relief. My suggestion is that it should also be accompanied by a long moratorium.

Q: That is a different issue. We cannot include new provisions because we don't know if RBI will agree to them but exactly the issues which Mr Terdal is raising, do you think these will be impediments to refinance and do you think a moratorium can be included in that case will it even qualify for the takeout financing which the RBI is allowing?

Bansal: The question of moratorium doesn't arise because now the COD has been achieved, number one. Number two; the relief will be straightaway available because in the initial stage because of the ALM issues we have been funding these projects only from, say from 12 to 15 years while the economic life of the asset even at the time we accepted and we presumed that it will be 25 years. In road projects straightaway it is given that the concession period will be for 20 years or 25 years or 30 years. So to that extent we can extend the repayment period naturally the instalment pressure will come down and to that extent the money whatever is available that can be used for completing the remaining projects which will be used as equity. So it is a win-win situation for the banks.

Q: Will you therefore also reduce the interest rates, will there be any scope and secondly will you require greater equity from the promoters especially if they tell you that there has been a cost overrun and therefore they want a bigger loan or will those not be entertained?

Bansal: It depends on case to case. Reduction of rate of interest will naturally be considered because the risk has gone. During the construction period the risk is huge. So to that extent that risk has gone, now the project has started yielding cash flows. So the banks will be in a position to consider reduction in interest rates on case to case basis depending upon the promoter and his credibility in the market. As far as expecting more equity and asking for more skin this is again case to case, but by and large nothing was available. Banks were scared that a large number of projects which we started financing in 2004 to 2007 and then either the COD is not achieved or the COD has already been extended until the various dispenses available because once COD is not achieved then you can restructure the asset without inviting the NP recognition amounts for two year period the circumstances are beyond the control of the promoter. So all these things will be resolved and RBI has taken a very good step to give relief to the banker as well as the promoter.

Terdal: I fully agree with Mr Bansal because RBI is not really concerned about whether you will reduce the interest rate or you will give moratorium. This will be basically dependent upon the banks own decision and accreditation. So I fully agree with him, that is why I said to what extent benefit will be available will be depending upon the credit worthiness of the client as well as the bankers.

Q: But in any which way it is going to be beneficial?

Terdal: Absolutely, there is no doubt about it.

Q: Because at least it is a given that you are going to get more instalments and as Mr Bansal says it is almost a given that you will get lower interest rates because the risk period is over?

Terdal: Absolutely correct.

Q: So, to that extent you expect a lot of projects to avail of this?

Terdal: No doubt about it.

Q: You were raising the point that the very appetite for infrastructure loans is not there and therefore you were wondering who will take out. The point is 75 percent of the existing lenders themselves can do it and after all we know that it is the same set of banks who are involved, most of them, out of the 30 banks, 20 or 25 of them will be involved in every loan. Will it not stand to reason that everyone will want to contribute to this because you expect the other banker to be cooperative in another loan? Do you think there will be hesitation at all, bankers should be willing or shouldn't they?

Gupta: These things can be argued both ways which way they will pan out; time has to tell.

Q: But you expect resistance from bankers?

Gupta: No, it's not a question of resistance. So what are the issues? It is right that the project has been closed out and to that extent, the risk has gone down. Who is looking for that takeout? A person who is in stress and who wants a relief; if there is a project which is going on fine and everything is great, they can have a competitive advantage out of a takeout but it is not required for liquidity.

Q: No, it is not required for that project..

Gupta: The project for which it is required, you will not get lower rates of interest because the project is still stressed.

Q: I completely agree but what I am saying is that for a standard asset, for which you are not stressed, you are going to get more relief, in the sense you will get lower interest rates which is always welcome, you will get a longer repayment period, always welcome. So, if you are interest rate, interest outgo on project A was Rs 10 crore, it will now fall to maybe Rs 8 crore or maybe Rs 7 crore and the Rs 3 crore you save, you can use better on your stressed asset.

Gupta: Hopefully but these are SPVs. It is not that fungible that you take profit out of one SPV and put into another. If there is an equity requirement, maybe that can be mitigated to that extent the promoter will have a surplus but otherwise it is not a given in infrastructure that a surplus of one will go to mitigate the shortfall in the other. The second point is that takeout has to be new lenders.

Q: Only 25 percent by new lenders?

Gupta: No, 25 percent on the total exposure must be taken out and the takeout has to be by people other than the consortium and that is why this 50 has been reduced to 25 – one of the reasons, so you have to find lenders outside of the existing consortium who will take this out. If this is a large project – that itself is a challenge.

Q: It is a community of bankers who are faced with these stressed projects and you have to find only 1/4th more.

Gupta: And those 1/4th have to be willing to take out a stressed project because typically for those 1/4th or for a client who is scouting for a new banker, the perception could well be that here are 75 percent stressed bankers who want relieve at my expense. So, I do not know how that is going to pan out.

Q: I thought there could be a quid pro quo because all banks today are faced with one project or the other.

Gupta: But experience has shown that that is not the way it works. The biggest pitfall in consortia or in multiple lending is that bankers never come to a consensus; they don't come to consensus in good times because they are undercutting each other for business, they don't come to a consensus in bad times because everybody is fearful that he will be compromising his position – that is the reality and that brings me to my other pet point on which I headed that committee on how consortia could function better. You need in India a rigorous consortium mechanism where one lender actually is the interface and sharing is transparent and equitable amongst the others. There has to be a smaller group of lenders which will decide on behalf of all the consortium members and that has to be mandatory or binding. As long as Reserve Bank of India (RBI) keeps on saying that this is a freedom we had given and we do not want to roll it back, I would counter argue that today we are yet not prepared for that freedom and overwhelming evidence has shown that.

Q: How much do you think this will give relief?

Terdal: The other way of looking at it is at least when the banks were willing to finance, earlier there was no platform available to them finance. Today to that extent this is welcome because there are some banks. However, from my experience normally what use to happen, these big five-six or seven banks, they have never participated in consortium altogether. Therefore, my feeling is if there is a platform that is acting as an enabler, these banks will be able to do a sort of a sharing in their own understanding. I do not say exactly a quid pro quo but they will be able to accommodate as many people as possible provided the borrower is a creditworthy client.

Q: Do you think that we are going to see a reasonable amount of relief for the infrastructure owners and therefore less stressed assets in the future because the infra project guys have a little more money?

Bansal: I am a positive banker. I am hopeful that lot of relief will come to the promoter but ultimately it depends on the credibility of the promoter. If he is in a position to complete – out of five projects in hand, three projects have already achieved commercial operation date (COD) then in remaining two projects he will be in a position to sail through comfortably because the existing three projects where COD have been achieved, he will get a lot of relief.

I think this movement of money from one account to other or one SPV to other, all these issues can be resolved. This will not be a major problem because ultimately the main promoter, when you calculate is total liability towards banking sector then look at the overall promoter's liability towards the sector then how much is the stress. So, it will be good for the banking, it will be good for the promoter but the only thing is we need to sit together, we need to work out the methods and that maybe in another three-six months time, a lot of activity will be there on the ground.