Post rate cut, cost of borrowing may go down by 50 bps: REC

Coal shortages have been digging a deep hole in State Electricity Boards’ (SEBs) pockets. Power companies too seem to be facing the brunt as they don’t have resources to generate more power. These mounting losses have prompted SEBs to hike power tariffs anywhere between 10 to 37%.

SEBs have been saddled with almost Rs 80,000 crore worth of loans. Rural Electrification Corporation (REC), one of the biggest lenders to the sector, has an exposure of Rs 9,000 crore to Tamil Nadu, Rs 6,000 crore to Andhra Pradesh, Rs 1,000 crore to Rajasthan and Rs 6,000 crore exposure to Uttar Pradesh.

REC whose total borrowing stands at around Rs 30,000 crore was affected positively by yesterday’s generous 50 basis point rate cut, courtesy the Reserve Bank of India (RBI).

HD Khunteta, the director finance of the company says, “We will now be able to raise funds lower by around 20 bps compared to what we have raised earlier.”

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: How exactly will you’re cost of funds improve going forward post the 50 bps cut yesterday?

A: The RBI has taken a bold step to cut the repo rates by 50 bps. The market was expecting a cut of 25 bps so it is surprising. As far as the bond market is concerned, AAA bonds were earlier quoting at around 9.65 now the rates have come down to around 9.45 so there is a reduction of 20 bps. Naturally, REC will be able to raise funds lower by around 20 bps compared to what we have raised earlier.

At the same time, in 2011-12 we raised Rs 30,000 crore from the market and our cost of borrowing was only 8.20 and it is because of the mix of international borrowing, tax free bonds, taxable bonds, capital gains bonds, we have not raised any money from banks directly. Even then when interest rates peaked, our cost of borrowing was very low at 8.20.

In the current year, we are thinking that on the total borrowing of Rs 30,000 crore and if inflation rates further come down to 6.5% as projected, then during the year, another cut of 25 bps maybe there if the interest rate is also coming down.

So my cost of borrowing maybe lower by around 50 bps compared to the last year. That is a benefit to us. On the lending side, if banks will raise the interest rate on the lending side then we will also adjust somewhere and net interest margins (NIMs) of around 435-440 bps.

Q: Is that an improvement or is it the same as what it was for FY12?

A: There is an improvement of around 5-10 bps but everything depends on the interest rate, which will be charged by banks. Banks have so far not decided and they are just fretting about their cost of funds. If they push the interest rates down and the lending rates, their interest rates will become much cheaper than REC then definitely we have to look at our options but as on date, the bank interest rates are higher compared to REC. So on the lending side there may not be a need to reduce the interest rate immediately so that way it will increase our net interest margin.

Q: Let me come to the other issue of the state electricity boards and the receivables you may have with them. We have seen six companies raise their tariffs at varying degrees - 7-37%. How does this impact you at all? Give us an idea of the comprehensive impact this will have or could have on your P&L?

A: Because of the inflow on account of the increase in tariff, naturally they will be in a position to service their interest payment and repayment of loan to the financial institution. Last year as well, the Tamil Nadu in spite of the huge losses they have made their payment in time. Even Uttar Pradesh has made the payment in time. If the trend of increasing the tariff continues for the current year, 24 states have already increased, UP is also likely to increase by 33% that will be sufficient to service the interest payment and the repayment of loan of the financial institutions and banks.

Now the discoms are also waiting for the Chaturvedi Committee report if they recommend that 50% of the short-term loans or the entire short-term liability is taken over by the states then the financial health of the discom will further improve and they will be in a position to service all the repayments.

Q: Right now in FY13 do you see lower provisioning and lower NPLs?

A: In 2011-2012 we made a provisioning of Rs 49 crore and in the current year also, a further 10% of the provisioning is to be done. As far as the discoms are concerned because of the increase in tariff, I am confident that they will make the payment in time and that there is no need to make any further provisioning on account of any delay or NPA from the discom sector.

Q: You spoke about UP briefly where there is 23% tariff hike expected analysts are watching out for Uttar Pradesh and West Bengal in terms of the SEB problem going forward, by when can we expect this 33% hike in UP and also what would be the situation on West Bengal then?

A: We talked to the UP director finance and chairman and they have already filed the writ-petition. They are expecting the regulator’s response shortly. So within one month that tariff should be increased. In case of West Bengal we are not taking too much exposure. Since the West Bengal government is not agreeing with the increase in tariff announced by their regulator at the state level, I cannot comment but we won’t give money to West Bengal unless they increase the tariff. That is our policy.

Q: What will your NPLs likely be in Q4? Will it be lower and any projection at all for FY13?

A: Our additional accounts will be put up to the board in Q2 of May so it will not be proper for me to say the figures.

Q: Directionally is it lower?

A: Compared to the fourth quarter of 2010-2011, the results would be better for 2011-2012. This would be due to the growth of the bottomline for the whole year by around 8.9%.