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H D Khunteta, Finance Director, Rural Electrification Corporation (REC)

30 Dec 2010

Rural Electrification Corporation (REC) is all set to bring out its infrastructure bond issue and even after the recent disappointment of IDFC, seems quite buoyant about the development. InfralineEnergy's Chhavi Tyagi spoke to Khunteta on REC's impending issue and the recently granted status of an IFC to REC.

Edited Excerpts

How much fund is REC planning to raise through its infrastructure bond issue? What will be the key features of the bond to attract the investors, considering the poor performance of IDFC infra bonds recently?

REC may raise around Rs. 1,000 crore, which is 25 percent of the incremental borrowing of Rs. 3,974 crore (i.e., of Rs. 21, 132 crore during 2009-10 and Rs. 17, 158 crore during 2008-009). Because of this limit, we can only raise Rs. 1,000 crore, approximately.

"We may consider higher interest rate since G-sec rate has gone higher to 8.004 percent for five years and 8.27 percent for 10 years. The rate of IDFC bonds was 7.5 percent and 7.75 percent for the five and 10 years bonds, respectively, which might be one of the reasons for not receiving the desired results."

While it is true that the response to the infrastructure bond issue of IDFC and L&T Infrastructure was not as per the expectation, we feel positive about REC issue. I believe that the market for the infrastructure bonds will definitely open up in the early months of the year 2011. Keeping this in mind, we are likely to approach the market in the second or the third week of January 2011. We may consider higher interest rate since G-sec rate has gone higher to 8.004 percent for five years and 8.27 percent for 10 years. The rate of IDFC bonds was 7.5 percent and 7.75 percent for the five and 10 years bonds, respectively. This might have been one of the reasons for not getting the desired response. Also, the existing investors know REC better through its IPO/FPO issues, which is another reason for us to hope for a better result. Besides, REC is a government of India's own company, which gives it the added credibility. We are also more capable to provide a better reach to our investors owing to 54 EC bonds. Additionally, we will also reach customers who do not have a Demat account. Therefore, we are confident that whatever targets we have fixed, we'll be able to achieve them.

We are very hopeful about the rising investments in the generation sector as the next five year plan targets to commission about 100 GW of capacity. The private sector is also responding well to the increasing demands of the sector. For instance, Adani Power has been able to commission its project within the time schedule, in spite of challenges and is earning above 90 percent of the PLF (Plant Load Factor), Lanco Amarkantak Power's project got delayed only by six months and that was only on the account of the delay in getting the skilled manpower, because of the government policy. We have not yet seen any private sector projects getting unduly delayed. While factors like land acquisition, environmental clearances, etc., may result in minor delays but on most of the projects the work has started as per the schedule.

REC, along with PFC, has also decided to foray into commercial banking through the route of a special purpose vehicle, or is it going to be a separate endeavour, according to your earlier plans?

REC is willing to promote the bank. However, we are waiting for the RBI guidelines to take a further view in the matter. Though it is still early to say anything concrete yet REC is interested to promote bank to increase the value for the stakeholders. However, one thing is very clear that REC is interested to promote the bank and not to convert REC into the bank.

"After three to four years, when we have to compete with other banks as well, there may be more pressure and moreover, the bottom line will be much higher, so to grow at 25 percent at a higher base, sometimes, it looks very difficult. Therefore, we are hopeful that the bank can add to our bottom line and we can grow faster."

We are looking five years ahead when the banking sector will grow much faster because of the likely allotment of the Unit Code Number. This will help villagers or other citizens to open Demat accounts, without requiring compliance with a number of formalities. The 8-9 percent rate of growth of the economy will help the banking sector to grow much faster. The examples of the AXIS bank or the Yes bank are for everyone to see. I think that if we promote the bank with either PFC or with some foreign bank then we can have the expertise of that bank and the brand name of REC. At this time I cannot say whether we are discussing with any foreign bank. I hope that after five to seven years, this bank will add a significant amount to our bottom line at the time of consolidation of the annual accounts. It will definitely add to the value. Secondly, at this time, our net interest margin or return on net worth and return on total assets are much better than banks, including international banks, so our financial parameters are the best.

However, after three to four years, when we have to compete with other banks as well, there may be more pressure and moreover, the bottom line will be much higher, so to grow at 25 percent at a higher base, sometimes, it looks very difficult. Therefore, we are hopeful that the bank can add to our bottom line and we can grow faster. However, I can't yet say whether we are going to promote the bank or not. A lot depends on the policies and further discussions.

Since, REC specifically deals with only the power sector, would it have any bearing on the prospective bank's target consumers?
Actually, I have my own doubts whether the RBI will give the permission to finance only the power sector. The bank has to work under the banking regulations, it will have to offer SLR, CLR; it will have to provide funding to various sectors. So, providing funding only to the power sector will be a bit difficult. So far only two banks, the National Housing Bank and the NABARD have been authorised to deal with specific set of clients, but they mostly engage in re-financing work and do not act as a bank. So, I don't think that promoting this bank will only feed the requirement of the power sector. However, it will definitely benefit the power companies, though indirectly because, as a separate bank, it will earn the profit and REC will have more consolidated funds.
How is the company using its status of an IFC (infrastructure finance company)?
We received the status of an IFC on September 17, 2010 and with it, REC will be able to increase its exposure limit by 5 percent of its net worth for lending it to single borrower as well as 10 percent of its net worth to single group of borrowers. Also, exposure for lending to the banks would also be enhanced by 5 percent. Plus, REC would be able to raise ECB to the extent of 50 percent of its net worth subject to the limit of US $ 500 million per year. We can also raise funds through the issuance of the infrastructure bonds. Also, our net worth, which was only Rs. 6,000 crore in the year 2009, will increase to Rs. 12,000 crore rupees by the year 2012. Owing to these additions, we are likely to hit the market in second or third week of January with the issue of our infrastructure bonds. As far as the exposure is concerned, we have already sanctioned the loans to LANCO Amarkantak's project. There are talks going on with other companies.
What are the issues faced by REC while sourcing external commercial borrowings (ECBs)? Has the recent RBI's circular on external commercial borrowings and trade credits dated July 01, 2010 brought any change or clarity?

There is no specific issue faced by REC in raising ECBs. RBI's circular has not given any specific relaxation to REC. On the contrary, after the IFC status, REC can raise up to US $ 500 million per annum through the automatic route, without requiring RBI's approval. In fact, we have found borrowing through ECB much cheaper than the domestic borrowings. So in the current year, our plan is to raise around US $ 1.2 billion to US $1.3 billion. Before this year, our total outstanding was at around Rs. 1,800 to 2,000 crore, and at the end of this year, the total outstanding will be more than RS. 7,000 crore.

"We have found borrowing through ECB much cheaper than the domestic borrowings. So in the current year, our plan is to raise around US $ 1.2 billion to US $1.3 billion."

Recently, we raised US $ 470 million through syndicated loans and our rate of interest was one of the best. So, the rate at which we have taken the money is one of the best in the industry. Therefore, as far as ECB is concerned, we don't have any difficulty. We are trying to raise the money on our own and the only objective is to raise the money cheaper than the domestic market.

Following the National Solar Mission, a good number of participants have come ahead for setting up various solar thermal and PV plants. Has REC been approached by such developers? What are REC's plans in this regard, considering high capital cost and ambiguous returns?

REC has already received four requests from the developers of solar thermal and PV plants, which are, Raj Ratna Energy Holdings, Ray Power, Vandana Solar and Amrit Jal Venture Pvt. Ltd. for loan assistance of Rs. 15 crore in each case and other 4-5 parties are making enquiries in this regard. Though, in states like Rajasthan, Gujarat and a few others, people have shown a lot of interest. Regardless of this, I feel that the response to the solar power projects from various developers is extremely bad. The reason is that the bid process has started and the rates are not known for PV thermals, thus the developers don't know what would be the likely price. Though these companies have approached us, yet unless we have the assurance of the security of our investments we cannot go ahead. We are in the process of framing the policies about the minimum PLF, guarantee of the purchase of power, etc., which will make our investments secure.

We do not want to be in a situation where the developers promise a PLF of 20 percent and only deliver a PLF of 11 percent. Because then, these developers would not be able to collect the money from NTPC Vidyut Vyapar Nigam. Why would NTPC Vidyut Vyapar Nigam pay when they would not receive the promised units?

However, it is a big market and we don't want to lose on the opportunity, but at the same time, our money should be secure. Ours is a zero NPA (non-performing asset) company, I don't want that by investing in these plants, this should become NPA. But, at the same time we want to develop the renewable energy resources market and that is why we are coming out with a policy, considering all the aspects. We are not averse to providing the money but we are focussing on making our recovery mechanism secure. It will take 4-6 months to come out with these policies. We will also be discussing with the developers, manufacturers and after discussion with all the concerned parties, we will be able to provide further assistance to the developers. They must be able to give the interest and repay the loan on time. That is the objective and at the same time the nation must get the power through renewable energy.

(InfralineEnergy thanks H D Khunteta, Finance Director REC for sharing his valuable insights with our readers. The column 'In Conversation', is a platform to engage experts from various sectors to share their views on the different transformations in the Indian energy sector)