REC said it expects the momentum of business growth to pick up despite posting its worst performance in 12 quarters with respect to asset quality, net interest margins and spreads.
“Loan book has grown about 20 percent, sanctions have grown 28 percent and our disbursements continue to grow and particularly our presence in the renewable segments has improved. We expect a number of assets to become standard during the course of the year and we expect the momentum in terms of business growth to pick up,” said PV Ramesh, CMD of the company.
He added that their exposure to the private sector was less than 14 percent of our loan book.
“Our cost of borrowing has come down to almost 7.5 percent is 60 basis points (bps), lower than compared to what it was last year and then we continue to see that in the future, this would only improve,” said Ramesh.
Watch Here: Expect momentum in terms of business growth to pick up, says REC Edited Excerpt: Sonia: I was just going through your numbers. This is the worst quarter in very long with respect to asset quality. Your gross NPAs this time are almost at 7.2 percent. Tell us whether you expect any kind of pressure in terms of asset quality to continue over the next few quarters, and what is the trend looking like? A: REC is in the long term financing business and so one could not judge our performance on a quarter-to-quarter basis. So let us look at the annual performance results. Our loan book has grown about 20 percent, sanctions have grown 28 percent and our disbursement continues to grow, and particularly our presence in the renewable segment has improved.
As you know, as an NBFC, we are not covered by the Reserve Bank of India (RBI) circular of February 12. Nevertheless, as a way of abundant prudential caution, we have made provisions because we are part of the consortium in all these private sector Independent Power Producers (IPP) assets and all these are thermal projects. We have made this provisioning so our NPA is really as a consequence of our partnership of a consortium with the other banks.
We have been aggressive in terms of provisioning so that we can only go upwards now onwards. We expect a number of assets to become standard during the course of the year and we expect the momentum in terms of business growth to pick up.
Latha: For the banks themselves, they have time till June 30 to recognize their standard restructured assets as NPAs. So there could be more recognition in the April-June quarter as well. Would you say that all the impact of the RBI dictate is recognized or will you have some tail to recognize in the April-June quarter? A: I do not expect so because our exposure to the private sector is less than 14 percent of our loan book. All our assets, we have carefully reviewed asset by asset and then taken action to see that our books reflect what we are required to do. So, whatever has happened is behind us, it will be positive, robust growth in the days ahead. Latha: What about the numbers then – your net interest income (NII) has also fallen because obviously you lose income recognition from those that you recognize as NPA. So will we see a positive NII in the current quarter itself? As well, provisions, what percentage of the assets is provided, as the assets age will there be more provisioning pain in this quarter and the next? A: Not really. If you really see, our NIMs continue to be closer to 4 percent. They are certainly lower than what it was, but it is still highest in the league. It is nearly 3.9 percent.
Our yields continue to be above 3 percent and this is a partial adjustment that had to be made as part of the market response. As you can see, our cost of capital, our cost of borrowing really has come down to almost 7.5 percent, it is 60 basis points lower than compared to what it was last year. We continue to see that in the future this would only improve.
We have made provisioning aggressively, as per the RBI norms, we do not believe that there would be a need. In fact we are expecting a number of assets to become standard in this coming quarter to two, at least we expect four of them almost amounting to Rs 4,000 crore to become standard and we are at an advanced stage of resolution of these.
Q: I also wanted to ask you about the renewable segment. I know it is a very small portion of your loan book right now, but you did mention fleetingly that you are seeing an improvement there. What kind of improvement are you hoping to see and how much could the loan growth be there? A: If you have seen, our sanctions this year or the last financial, 9 percent of the total sanctions were in the renewable segment and disbursement is nearly 7 percent. Though it is a part of 1 percent of the overall loan book, now I expect this to grow quite substantially given the government's ambitious target of adding 175 gigawatt by 2022.
Our footprint in the renewable segment is fast expanding. We expect this proportion to grow in the coming days. Both as the proportion of the overall loan book and also as a part of the sanctions and the disbursements. So, renewable segment is where we are focusing substantially and that is across the diversity of the renewable segment and also evacuation infrastructure.
Q: Year-to-date (YTD) bond markets yields have gone up by 150 basis points. They could rise further, will you be able to pass on everything and still maintain your margins? A: We have to be responsive to the changes in the market. Obviously we need to pass on this to our clients and continue to work with them in this. We already see hardening of the interest rates, our own lending rates have gone up in the past few months, and I foresee we will have to respond to the market. Q: There will be about 1.50 lakh crore of plants that could be marched to the NCLT. There was a lot of talk that PFC, REC, NTPC, these bodies will either takeover management or float a special purpose vehicle (SPV). Is there any progress on this? Otherwise, we are going to see a lot of assets go to the NCLT? A: We have taken a lead in this. We are actively pursuing this proposal. It is not to take over the assets, the proposal was never to to take over the assets, it is really to create an asset management and revitalization company in which we will hold a stake along with the other financial institutions and potentially National Infrastructure Investment Fund (NIIF) and such other entities which together, these assets would be transferred and would be managed professionally during the period of transition.
As you know, with Deen Dayal Upadhyaya and Saubhagya pushing ahead, the demand should pick up very fast.
Q: Has NIIF committed money that was what was not clarified last time around? Is NIIF going to bring the money and therefore this SPV will take over some assets even financially? A: We are still in discussion. The specifics are being worked out. It is not so much the money that is required, it is essentially an institutional framework to bring these assets, and to warehouse them, manage them during the period of transition.
We have being saying very consistently and clearly that the financial institutions will maintain an arm's length from this SPV and they will continue to make provisioning as per the RBI norms and this would be managed professionally.The essential thing is that we are going through a transition period of a dissonance between demand and supply and as the demand picks up, these assets would be required to be managed. As the renewables component expands, you would require thermal assets to balance them. So, taking the whole sector into consideration, there is a need for safeguarding the assets. This is value preservation.