With most power projects in the country facing problems on fuel, land and rate subsidies, government-owned Rural Electrification Corporation is treading cautiously. In an interview with Mansi Taneja & Jyoti Mukul, its chairman and managing director, H D Khunteta, says governments should pay for all subsidies, so that the revenue inflow of distribution companies is equalised to meet all obligations, including the cost of purchase of power. Edited excerpts:
In a high interest rate regime, what kind of impact do you see on your spreads?
We have borrowed Rs 13,000 crore in the current year and our incremental cost of borrowing is 8.5 per cent. On the lending side, the yield on the loan on an incremental basis is 12.5 per cent. So, we are maintaining the spread at 350 basis points (bps), even higher. As on date, our overall borrowing is Rs 75,000 crore and the average interest rate is 8.25-8.3 per cent, whereas average yield on the total loan dues, a total of Rs 88,000 crore, is in the range of 11.4-11.5 per cent.
So, in spite of the general increase in the interest rate by around 200 bps, our cost of borrowing has not increased to that extent. It has increased from 7.85 per cent to 8.3 per cent. Our borrowing cost is maintained at a very reasonable level, compared to Power Finance Corporation. As on date, our cost is around 50-75 bps lower than PFC.
In the current year, we have increased the interest rate thrice. From the first quarter till date, the overall increase is 75 bps. So, whatever the increase in the cost of borrowing, it has been offset through the increase in lending rates.
Has your lending been impacted by the high interest rates?
In the current year, the growth in disbursement is 16 per cent, compared to the previous year, despite an increase in the interest rate by around 50-75 bps. Our rate of interest is most competitive, compared to banks and other financial institutions.
What is your outlook for the power sector, that faces fuel supply and land acquisition problems?
There is a very critical situation on the coal supply or gas supply issue on the financial health of distribution companies. Some state governments provide power free of cost. The government should pay for such subsidy, so that their (power companies’) revenue inflows are equalised to meet all their obligations, including the cost of purchase of power, interest repayment of loan and the transmission charges.
On coal shortage, the government is working on the issue. Coal India can also call international bids.
Do you expect that some companies might default on loans? How are you hedging this risk?
We have not sanctioned any loan to projects that are supplying all power on a merchant basis. We have sanctioned loans only for those where at least 70 per cent generation capacity will be sold under a power purchase agreement, on a long-term basis. This ensures repayment of loans. From April 1, we have been insisting on a fuel supply and a power purchase agreement having been signed already, without which no disbursement will take place. Earlier, we sanctioned loans on the basis of a commitment of coal linkage. Now, we want the specific quantity mentioned, that they will supply so much coal to the private sector or the state company. So, that on commissioning, the plant load factor or capacity utilisation can be maintained at 70 to 80 per cent.
We have also put restrictions on providing short-term loans to discoms (power distribution companies), mainly in states like Haryana, Rajasthan, Tamil Nadu, Uttar Pradesh and Punjab, as the financial health of discoms in these are not good. Since June, we have not sanctioned short-term loans to these discoms and the result is that Rajasthan has increased the tariff (rate). Tamil Nadu is likely to increase tariffs by November.
None of the states have so far defaulted to us. We will not sanction short-term loans to these states unless they indicate how they are going to bridge the gap between average revenue realisation and average cost of supply. Besides, they should come up with a clear roadmap on subsidy payments by the state government and indicate how they are going to reduce aggregate transmission and commercial losses.
Do you foresee defaults from private players?
We have sanctioned a loan to Reliance Power's Sasan (Madhya Pradesh) project. They own mines, so they will not face any difficulty. As for Reliance Power's Krishnapatnam (project, in Andhra), although we have sanctioned the loan, work has stopped. We have not disbursed any amount towards Krishnapatnam; we’d sanctioned about Rs 2,000 crore.
For Sasan, we disbursed Rs 227 crore as on June 30, of a total sanction of Rs 1,342 crore. We have also put up conditions on the Sasan project for the sale of coal to other projects.
The price of the coal will be decided in consultation with the lenders, or they merge their Chitrangi project in Madhya Pradesh with Sasan just to improve the viability. We have taken all the precautions before disbursement. That is why most of our projects are not in trouble.
For Adani Power, we have sanctioned the loans, but the solution will definitely come. They have not defaulted so far.
What are your fund-raising plans for the current financial year?
In the current year, we will borrow around Rs 30,000 crore from the market. We also have plans to raise $1.5 billion (Rs 7,250 crore) through ECB (external commercial borrowing). As on date, we have borrowed Rs 13,000 crore from the market, including $300 million (Rs 1,450 crore) through ECB, at an incremental cost of 8.25 per cent.
Have you restructured any of the loans of private companies because of any problems?
Last year, we did not restructure any loan. So far, the request is not there. Out of 60 sanctioned loans, four to five cases may come up in the next one to two years for restructuring, because of a coal issue or other issue.
REC currently lends only to the power sector. Are you looking to go beyond that?
We can do backward or forward integration as for coal mines, where coal will be supplied to the power sector or the transmission lines, used by the railways or others. So far, we have not done anything on these lines but our mandate is there. Now, we have approved underwriting loans up to Rs 3,250 crore. That is the new change, just to increase fee-based income. It was approved in May-June.
Have you underwritten any loan yet?
We are in the process of doing it. We want to take up those projects that have coal mines. In the current year, we should take up at least two-three such projects, where the fee is very good.