Speaking to CNBC-TV18 Deepak Parekh, Chairman of HDFC, said that the recent Cabinet move is an excellent one. â€œAll contracting companies from L&T onwards are overburdened because of arbitration process. Every project goes into arbitration and after that it goes into court. Arbitration takes a long time,â€ he said.
Last month the Cabinet asked government agencies and public bodies to pay 75 percent of the money to contractors, even in case of a dispute. The move will bring more money into stressed construction sector and help create more jobs. The Cabinet also ruled that whenever there are time-consuming disputes pending between public bodies and construction contractors, these could be shifted to the new arbitration procedure.
Speaking to CNBC-TV18 Deepak Parekh, Chairman of HDFC, said that the recent Cabinet move is an excellent one. “All contracting companies from L&T onwards are overburdened because of arbitration process. Every project goes into arbitration and after that it goes into court. Arbitration takes a long time,” he said.
Even if the arbitration is in favour of the contractors, the government or the state authorities go to the court, he added. The process is so long the banks don’t want to fund them because outstandings are large, he maintained.
“If companies get 75 percent of money, work can go on. There is a huge opportunity for contracting companies.”
He also mentioned how no contracting company has resources because they are overleveraged.
Talking about HDFC, he said one or two loans in housing construction are far stretched. “We have to hand-hold the developer, release small amounts of money which we are doing.”
Below is the transcript of Deepak Parekh's interview to CNBC-TV18's Ritu Singh.
Q: What are your views on the construction reforms announced by the government that 75 percent of the arbitration money has to be paid upfront?
A: I think the recent move by the government is an excellent move. All contracting companies from Larsen and Toubro downwards, the large, the medium, the small are all overburdened because of the arbitration process. Every project goes into arbitration and after arbitration it goes to the courts. Arbitration takes a long time, they don't get the money and even if the arbitration is in the favour of the contractors the government or the state authority goes to court. So, the process is so long and the banks don't want to fund them because the outstandings are large.
So, now that they get 75 percent they can carry on the work because there is huge opportunity for construction. What India needs today is to construct, build, whether its roads, ports, airports, housing, offices, irrigation, factories. So, there is a huge opportunity for contracting companies. However no contracting company has the resources because they are stuck on the overleveraged because of the past legacy problems.
Q: Over 25 percent of the construction sector accounts are non performing assets (NPAs) or stressed. To what extent will this address that problem for the banks?
A: There are some contracting companies who have become NPA, I don't want to name them, there are quite a few. For some of them this will certainly help. So, instead of being NPA, the money will be received by the banks and they will only have to give a guarantee.
Q: Could you tell us what is the proportion of loans for HDFC - your non individual loans in the construction sector that may be stressed?
A: Our loans in the construction sector for housing, one or two loans are stretched but the construction is going on. We have to hand hold the developer, we have to release small amounts of money, we have to see that, that building which is under construction gets complete. So, we are doing that handholding operation with some of the builders.
Q: Talking about the broader level of NPAs, we remember when the asset quality review (AQR) process had started you said comatose is also not good but now in hindsight do you think banks have emerged stronger, is there more struggle ahead because of the lack of capital.
A: It is still work in progress, the jury is still out. We had to take a bold decision some time to recognise you can't shove the problem under the carpet all the time. So, now it has come in the open, you will find banks every quarter giving more guidance of there may be more NPAs coming out, more provisioning we will have to make. However it is a process which has begun. It may take 4-5 quarters but it is a good step.
Q: Another looming issue is the FCNR(B) deposits, do you think now with the new liquidity framework, is that to some extent addressing the problem? Are we adequately prepared for the redemption that is coming up very soon?
A: We are absolutely prepared for the redemption, we have taken forward cover, the money has been organised, it is not going to impact your reserves significantly at all. There is no concern that the rupee will come down, there is absolutely no concern.
Q: On the inflation front the Reserve Bank of India (RBI) said it is still uncomfortable that the current levels of inflation are at the upper end of what it is targeting and therefore room for monetary easing is very limited. In your view is there any headspace if monsoons play well?
A: Monsoons have done well but the result will come after a few months, may be a few quarters. So, you may continue seeing these interest rates for the next quarter or so. However when the food grain production hits the market and the inflation comes down, you will see a slight reduction in interest rates but we are still 2-3 months away.