Funding environment challenging; NPAs to rise to 1.5%: IDFC
Finance player IDFC maintains that the current fiscal will be challenging from a growth perspective.
August 27, 2013 / 17:01 IST
Infrastructure Development Finance Corporation (IDFC) which borrowed huge amount of money from bond market in last 24 months feels that the funding environment remains challenging.
Executive Director Vikram Limaye told CNBC-TV18 that company’s focus in this financial year will be to figure out low risk growth opportunity. "We have maintained current fiscal will be challenging from a growth perspective." He sees NPAs rising to 1.5 percent going ahead.The company has managed its fixed income book well and given up treasury gains in this quarter, he added. Further he feels that steps taken by the government over last three months is positive for power sector. "They would be importing coal and higher cost will be passed through is important for power sector. I think SEB reform process is incrementally positive for the power sector. Government’s measures will help coal-based power plants."IDFC was in news after the company barred fresh purchases of its shares by foreign institutional investors (FIIs) and non-resident Indians (NRIs) on Monday. It also revised the ceiling on investment by FIIs and NRIs to 54 percent from 74 percent. These steps were taken with a view to meet the Reserve Bank of India’s (RBI) restriction on foreign investment (at less than 50 percent for new banks) in case it gets a licence.Below is the edited transcript of Vikram Limaye’s interview with CNBC-TV18Q: Has life gotten a lot tougher with the near term rates going up and even for that matter longer term rates? Would you see margins getting axed or trimmed for IDFC this year?A: As we have said before, funding environment is quite challenging in the current time particularly because it is very difficult to raise money from bond markets. From that standpoint, the only source of funding available is the bank market. Therefore from our perspective last year and for last 24 months we have borrowed quite heavily from the bond market, which was giving us much better rates than bank market. For any incremental loans that we end up doing that are financed from the bank market, there will be a squeeze on margins.Q: What could the squeeze look like? In the quarter gone by you had done net interest margins of around 4 percent which was about flat on a quarter on quarter basis. Because of the Reserve Bank of India (RBI) tightening measures and the fact that you have high exposure to wholesale funding, how much do you think margins could get crimped down by in the quarters to come?A: I don't think that is the way to look at it in terms of our business because the issue surrounding infrastructure has also to do with growth. Our focus this year is going to be to try and figure out low risk growth opportunities because the core project pipeline for infrastructure is quite weak. If you are going to lend to high quality corporates then in the current environment high quality corporates are getting pretty good rates.Q: Are you impressed by the moves made by government? We hear endless number of fuel supply agreements (FSAs) being signed by Coal India but actually Coal India’s production even last year went up by 3.8 percent. Do you really think the power producers fuel problems are resolved and more importantly have we found people to buy their power? Would you worry about that sector?A: Over the last few months, it has been positive to hear some of the announcements that the government has made. I would say that over the last three months all these announcements have been positive for the power sector. I would highlight three announcements that are important for the power sector, one is the announcement that coal could be imported and higher price of imported coal could be passed through. Second is the recommendation of Deepak Parikh Committee that was set up by the Central Electricity Regulatory Commission (CERC) to specifically address two issues surrounding Tata’s power plant and Adani’s power plant._PAGEBREAK_The third issue is the State Electricity Board (SEB) reform process where many of the SEBs that were not performing too well have signed up for the reforms and receivables from SEB and therefore have steadily been coming down. All these three are incrementally positive for the power sector. I am hopeful that as far as coal based power plants are concerned, these issues would go a long way to address the problems. For gas based power plants, gas pricing mechanism has been announced, but that is effective only next year. We will have to see how the gas based power plant issues gets resolved once that comes into effect next year.Q: On the asset quality side although your asset quality has been by and large quite stable, you have mentioned to analysts in your interactions that you are expecting stressed loans to rise going ahead. How much pressure do you see on asset quality in the quarters to come?A: We expect our non-performing assets (NPAs) to rise to about 1.5 percent.Q: Do you see any growth in the loan book at all? Where will growth come for IDFC say in the next 24 months before your banking license becomes an actuality? A: The issue surrounding infrastructure has more to do with growth and asset quality. On the growth front, core infrastructure pipeline has been weak for sometime because there hasn’t been any new project development that has taken place over the last 18-24 months certainly in power and also increasing the road sector has also been weak. Our strategy last year has also been to focus on low risk ways of growing and more than half of our growth last year came from operating assets. This year we will try and figure out low risk ways of growing, which would in this current environment mean trying to figure out opportunities to grow with high quality corporates. That has an impact on margins because high quality corporates in the current environment where credit growth is quite slow, will get financing at pretty attractive rates. From that standpoint, there would be squeeze on margins for the incremental lending that we do to high quality borrowers in the current environment.Q: In your other area where you actually made money was in fixed income. This quarter that looks difficult may be even next quarter. You would agree that that source of buttering the bread is not available for a couple of quarters?A: Yes I would agree with that. In fact we have managed our fixed income book quite well. While we did make substantial gains in Q1, we have given up some of those gains in the second quarter. The environment does look quite volatile and uncertain for the immediate term. Gains from fixed income trading would be muted for the immediate future. Q: This quarter would be a difficult one isn’t it, possibility of higher provisioning because of the way the economy is as well you don't have that money to provide from fixed income that you got in previous quarters. This quarter could be probably coming together of negatives?A: I am not really focused on a specific quarter per se and we have given guidance for the full year. So from that perspective, we have said all along that the current fiscal year will be challenging from a growth perspective and from a profitability perspective just given the slowdown in the environment. That will be reflected in the next three quarters. Our first quarter results were exceedingly good, but that is not reflective of how the rest of the year is likely to work out. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
