The first "green bond" issued by an Indian issuer has gone through and its listing has happened on the London Stock Exchange.
The USD 500 million bonds, issued by Axis Bank, have many first: they are the first green bond to be listed on NSE, the first certified bonds by an Asian bank, the largest by a scheduled Indian bank at T+160 basis points, are the lowest cost since the global financial crisis.
Speaking to CNBC-TV18's Latha Venkatesh after the bonds' listing, the bank's MD and CEO Shikha Sharma said proceeds from the issue would fund a whole of host of 'green' projects -- mainly in the renewable energy sector.
"We hope that this will open up the market for more issuers," she said.
Sharma also talked about a number of other issues: what to expect from RBI's monetary policy event, whether Rajan should get a second term and if the worst of the NPA cycle is behind.
Below is the verbatim transcript of Shikha Sharma’s interview with Latha Venkatesh on CNBC-TV18.
Q: Are the bonds already listed or is there going to be a separate listing occasion?
A: Yes, the bonds just got listed this morning, so we just completed the listing ceremony. This is a USD 500 million green bond and it is the first certified bond out of India.
Q: Have you already identified people whom you would be giving that money?
A: Actually in our current lending, we already have close to USD 1 billion of lending to projects which would comply with the climate bond initiative guidelines in terms of what qualifies for green bonds. So this funding is actually going to be earmarked against some of the loans we already have.
Q: If it is a green bond, do you get it cheaper than other money? What did it cost you in terms of an interest?
A: In terms of interest, this has been one of the tightest pricings of bonds at T+160, so we are quite happy with the pricing that we got here. The pricing is not very different from our other bond issuances, but what we did get was 21 percent dedicated green bond investors into the issuance and that is a result of the fact that this is certified. It has been audited by KPMG to be compliant with the climate bond initiative principles and we are hoping through this, to widen investor interest in green issuances out of India and listing on London Stock Exchange (LSE), hopefully gives it the right profile to serious green investors. So, right now, the pricing is very similar to any other dollar bond issuances that we might do, but as the market deepens, we would be able to access a different set of investors through this issuance.
Q: Is this green bond more for access to have a new category of investors to diversify your pool of investors? Also, if you can share with us some of the projects for whom you are earmarking this money, which companies and are they renewable kind of projects, if you can even give us some names of projects?
A: Yes, the whole purpose of having a certified bond issuance was to meet the tight governance standards that the climate bond initiative would want us to meet and open up the bond to the category of investors who are interested globally in investing in sustainable initiatives. So, as I said, this is the first such issuance by a bank from Asia which is climate bond certified and we hope that it will open up the market for more issuers whether it is Axis or other issuers who want to go through the same rigorous process.
In terms of where this funding will go, as I said, we already have a book of over USD 1 billion which would have qualified and met this criteria and we are earmarking USD 500 million of assets under that category to be refinanced through the green bond issuance. Most of these projects will be solar, wind, some mass transport, some green certified buildings, but a large part of it is really just renewable energy.
Q: I will come back to you on the extent of trading, secondary market trading in these and your medium term notes (MTN) as well. But since I have got you on the eve of the credit policy, I just wanted to ask you what are you looking forward to from the Reserve Bank of India (RBI) tomorrow?
A: The market consensus is status quo at the moment, but the last policy announcement by RBI was a big milestone where RBI has talked about a new liquidity initiative in terms of wanting to follow a neutral stance on liquidity - that is really important for the market right now. Just doing a repo cut, but not having sufficient liquidity in the system does not allow transmission to go through. But having liquidity policy which is going to promote better transmission is what has been a huge positive since the last monetary policy. So, we would really just love to see continuance of that and then at the right time, maybe there will be headroom for rate reduction, but we are expecting a status quo tomorrow.
Q: That is my next question on transmission. The RBI has gone the distance, from January, 2015 there have been 150 basis points in terms of rate cuts. Liquidity in the system -- the deficit has fallen from nearly Rs 2 trillion in the first quarter, to about Rs 50,000-60,000 crore now - that is hardly much of a deficit. It is less than one percent of the net demand and time liabilities (NDTL), Rs 70,000 crore of bonds have been purchased in open market operations (OMO) and the marginal cost of funds lending rate (MCLR) has also been introduced, but what have we seen by way of transmission, 75 basis points; not very impressive. Should we think that now as we are into the slack season, we will see more transmission?
A: First of all, while we have seen 150 basis point reduction in repo, there was also a 25 basis point rise just before that. So, the net reduction in repo has been 125. You have seen a transmission of over 75 basis points now. On MCLR, there has been a bit more of a transmission because MCLR is based on marginal cost of pricing whereas the base rate is more based on average and therefore, the base rate goes up slower and comes down slower as rates come down. As we move towards a neutral liquidity scenario, you will continue to see transmission.
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Q: So, in the next few months, by September or by December, would the cost of money for corporate fall by 25 basis points you think? Will home loan borrowers typically, big retail, 40 percent of your borrowers now, will they find money cheaper by 25 basis points you think?
A: If RBI follows new liquidity regime that they have announced and I am sure they will because we have seen all evidence to that effect, then yes, one can expect that rates should hopefully become softer and especially, if we have a good monsoon and we do not have any big surprises globally. On interest rates, as you know, there are always stuffs that happen and you cannot predict exactly, but if we have to assume that everything else remains the same, and it is only the liquidity regime which becomes more accommodative, then clearly, you can expect rates to get softer.
Q: Will it be a very big shock if Dr Rajan’s term is not extended?
A: That event is in September, so I do not think I want to hypothesise anything on what might happen. The government has clearly indicated that they will take a decision closer to the date. Dr Rajan has been a great Governor and I am sure, India will do what is right for the country.
Q: Today, the Finance Minister has spoken with banks and the Indian Banks’ Association (IBA) is separately meeting to launch two funds, a stressed asset equity fund and a stressed asset loan fund. Can you give us some idea of what is the size we are talking about? We heard about Rs 5,000 crore will come per fund from the banks. Is that the kind of amount it will raise and what will it do to the NPAs?
A: It is too early to call what kind of funding is going to be raised. But yes, the intent is that National Investment and Infrastructure Fund (NIIF) will fund maybe 50 percent of it and banks and other institutions can come in and fund the balance. So, we will have to see how that pans out. What it does do is it allows a new resolution strategy for some of these projects where if the project is fundamentally viable and it just needs some funding in the interim to tide over any liquidity mismatches, then the equity and the debt fund can help get there. Rs 5,000-10,000 crore is not going to fix the NPA problem, but it is another way of resolving.
Therefore, the resolution on stressed assets will come from multiple set of factors. The government has taken a lot of initiatives around some of the reasons why these projects got into trouble which may have been around the power project, the coal supply situation or the off takes where the power ministry has done a lot to improve that situation. On some of the roads sector as the economy picks up and the approvals come through and the projects get implemented, that should help. The other large cause of NPA of course, has been weak steel prices and there the minimum import price (MIP) helps a bit and the rest will be as the steel cycle recovers. So, there are different factors for why assets have become NPAs. Some of those factors where the government could take policy initiatives they are taking them.
However, as the economy revives, we should hope to see some resolution around that. And the whole bankruptcy code gets a greater sense of responsibility on the part of promoters to come and try and resolve these assets. So, that should certainly help as well. And the fourth, the NIIF plus the new asset reconstruction funds that are coming to the market will help provide funding where necessary. So, there is a bunch of things that are happening and all of that will help move us in the right direction.
Q: What is your understanding though? Will these funds come up in a month, two months or in a quarter?
A: It would take at least a quarter.
Q: Therefore, can you say, with some assurance, sine yours is the better of the corporate lending balance sheets that we are over with the worst and now we are on with the resolution process? The bulk of the bad assets known and we will not further too many big shocks? Is the worst over?
A: The economy, as I said, there are a couple of things. So, there were policy initiatives, where the government has taken a lot of steps. There is the issue of the economy recovering. I think sentiment is clearly improving. If you see the results of the last quarter, we are definitely beginning to see a positive turn to the earnings cycle for corporate India and that should help. I think banks have been cautious about the new loans that they are putting on. So, there is an ageing issue that comes through as well.
Having said that, you have seen our guidance now, for this year, which came through along with the year end results where we have guided that credit costs this year could be in the range of 125-150 basis points depending upon how soon some of this revival happens. So, our sense is that FY17 is probably going to be the peak for credit costs and after that, things should begin to improve.
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