Ever since it took office, the Narendra Modi government has made it clear that building infrastructure will be one of its top priorities. In a bid to come good on that promise, the banking secretary, GS Sandhu has written to the RBI governor asking the central bank to review its “stringent” lending rules to infrastructure companies.
In an interview to CNBC-TV18, Diwakar Gupta, former MD & CFO of State Bank of India, says the industry had been through a tough phase over the past four years and that it is a given fact it would require some handholding "without worrying about consequences".
Gupta feels each restructuring is a one-off and cannot have conditions and one simply cannot straitjacket restructuring with percentages. He thinks existing projects should be allowed in long tenor loan structuring.
Below is the transcript of the interviewQ: The letter of the banking secretary seems to suggest that these are suggestions that have come in from the banking industry and hence he is writing to the Reserve Bank of India (RBI) governor to see of the RBI can review its position on what the government sees as stringent loans as far as infrastructure financing are concerned. What you made of what Nayantara just articulated?A: Industry has really been passing through a very difficult phase over the last four years. Therefore it is a given that they need hand holding, they need support, they need to tide over these times where demand has fallen, input costs have risen and both topline and bottomline are under pressure.When you decide to help somebody you can't put rules around it because every restructuring is a one off. If you were to say that only 10 percent of cost overrun should be funded or likewise debt equity should be a certain amount or equity only must be brought in for restructuring then what you are saying is that we want to help but the rules around it will be such that that help will effectively not materialise. That would be the import of what has just been discussed although I don’t know in the public domain what exactly has been written.To use an analogy if somebody has been diagnosed with Cancer and has to be given chemotherapy you have to administer it without worrying whether the skin will go black and the hair will fall off. I understand RBI has also this requirement that our financial system should more and more be aligned to the global financial system because we are a connected economy, there are ratings, there are flows but what comes first? Saving yourself comes first.
Q: You believe that what the government is suggesting to the RBI makes sense. Let me ask you specifically about certain suggestions that the government has made and I am picking up on the point that you made that if you have to give patient treatment you cannot worry about the symptoms that go along with it because the banking secretary seems to suggest that the RBI that as far as allowing lenders to decide on the extent of funding, the debt equity ratio and the upfront promoters contribution which the RBI circular had pretty much rested the powers away from the banks, the secretary seems to be suggesting that this should be the prerogative of the banks to decide?A: I would agree completely. As I said earlier also each restructuring is a one off. There is no percentage that could put to the amount of receivables that a company needs to recover. So, there are companies which today have Rs 1000 crore which should have come back to them much of it from the government departments. Therefore every company has its own peculiar problems and constraints. If you straitjacket it into numbers or percentages then you are effectively blocking that company off from help even though the lenders might feel so. Equity is another example. Today who will put equity and who has the ability to raise equity? As it is people have been suffering for four years and somehow are continuing to survive.At this stage you can't expect somebody to be able to raise a whole lot of equity only to meet percentages about own contribution.
Q: One of the other suggestions that the government has made to the RBI is that the benefits of the long tenure loan based on the economic life of the project should also be extended to projects under implementation. What do you make of that suggestion?A: I think this refers to the 525 rule. 525 rule came in because you have an ALM mismatch. It is the structure which is impeding deployment or funding. So, the idea is to say that even though it is a 25 year low you can treat it as a five year exposure on the balance sheet. If that is the case I would agree that the logical conclusion is this should happen to all loans including existing loans. Likewise for takeout financing. Take out financing is available but the limit was 50 percent for new lenders which has now been brought down to 25 percent, RBI has been very nice to dilute that. My question is that if the bankers really feel that Take out financing is fine then we can get more lenders because they would like to support, why put any percentage? Existing lenders should be allowed to do it.
Q: The suggestions that have been made as far as levelling the playing field when it comes to ECBs are concerned because the government seems to believe and obviously this is feedback from the banking community that Indian banks are getting the rough end of the stick when it comes to ECBs?A: That is a free market. The fact is that foreign lenders will have greater access to dollar funds, they will also have better ability to take positions. So, there it is a free market. While we say it should be a level playing field you can't expect subvention or subsidy to the domestic lenders only because that playing field has to be levelled. There is a huge amount of opportunity in just rupee lending itself where rationalisation, quick credit and quick decisions above everything else are very necessary. There are enough lenders who have got a restructuring package but it has not got off the ground because individual approvals are to come or there is some small condition which is not being fulfilled and those are the things that need to be surmounted. Q: Do you believe that the RBI is likely to review, what does your gut tell you? The plea that the government is making do you believe that the RBI is likely to undertake a review of its circulars issued in August? A: I think they will. RBI has been proactive, they have never held on to a position just because they said something. I think they have been proactive, they have been changing the rules and structures around this kind of funding even in the last 4-5 months. I am sure they are going to have a good look at it.My only hope is that they will therefore not let form override substance. If you can make something simple and leave the discretion with bankers that is best. You cannot have a structure where you are doubting the effectiveness or the rationality of a group of lenders. You have to let them do their job.
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