‘We have not had any NPAS and wish to keep it that way’

PRO FORMA VS REPORTED NPA RATIOS

“WE ARE UNLOCKING VALUE CREATED OVER THE PAST 14 YEARS. ALSO, ONE OF THE MAIN AIMS OF THE PRESENT GOVERNMENT IS DEMOCRATISATION OF OWNERSHIP STRUCTURE OF PSUS AND THAT PEOPLE SHOULD HAVE A SHARE IN IT”

AMITABH BANERJEE Chairman and managing director, IRFC

While it may have just completed its listing on the stock exchanges, the Indian Railway Finance Corporation (IRFC) is unlikely to change its business model of financial leasing to the railways, says its Chairman and Managing Director AMITABH BANERJEE. However, the company is open to financing private projects that have forward or backward linkages with railways, Banerjee tells Vinay Umarji. On Friday, IRFC listed $750 million worth of overseas bonds under its $4 billion global medium-term notes (GMTN) programme on the global securities market of India International Exchange at the International Financial Services Centre (IFSC) located at GIFT City. Edited excerpts:

Post listing, is there a plan to change the company’s business model of lending to the railways?

The government’s disinvestment has been only 5 per cent and the fresh issuance of shares is 10 per cent. So, practically, it is around 14 per cent of government holding that has been diluted. As of now, 86 per cent of the share capital is being held by the Government of India. According to Securities and Exchange Board of India (Sebi) regulations, in course of three years, we will be offloading another 11 per cent to make it 75 per cent. As far as the business model or any relationship between the government and IRFC is concerned, it will remain the same. We will still be the extended borrowing arm of the ministry of railways. About 97.75 per cent of the total AUM (assets under management), which is ~2.78 trillion, is with the railways and the rest 2.25 per cent is with special purpose vehicles (SPVS) of the railways, that too towards development of railway infrastructure. We are into financial leasing. So, we acquire assets of the ministry of railways and hold them in our books.

What, according to you, are the reasons for the way the IPO performed?

First, we are unlocking value created over the last 14 years. Second, one of the main aims of the present government is democratisation of ownership structure of public sector undertakings (PSUS) and that people should have a share in it. At ~4,633 crore, this is one of the biggest IPOS that India has had among PSUS in recent times. For the first time, India has gone with the anchor investor route, with 30 per cent of the issue size being subscribed by anchor investors like Nippon MFI, HDFC MFI, Singapore government and Invesco.

Are you open to financing private rail projects?

The railways is one of the four strategic sectors. So, it may not be privatised but certain parts of it are being privatised, such as operation of high speed trains on certain routes. Some of the private players have also approached us for financing the rolling stock because of the low-cost funding. Depending on the viability of projects, we are open to private lending because we have not had any non-performing assets (NPAS) and we wish to keep it that way. We have to be very circumspect (with private sector lending). These projects will have to be very well protected and ring fenced. Only then we will go for them.

What portion of railways’ borrowings comes from IRFC and how will it change in the future?

Our AUM has been growing at a compound annual growth rate (CAGR) of 27 per cent over the last 3-4 years. We had disbursed ~71,000 crore last year, which was 48 per cent of the total capex outlay. This year, it will be ~1.13 trillion out of a total capex outlay of ~1.61 trillion of the railways, which is more than 70 per cent of the outlay. Next year, we have been given an initial mandate of ~65,000 crore. Last year, the initial mandate was ~58,000 crore, which grew eventually. The railways caters to only 50 km per million population as compared to 567 km in Russia, 500 km in the US, and more than 400 km in France. So, there is still scope for capacity augmentation.

Is the railways too dependent on borrowings?

Budgetary grant, known as gross budgetary support (GBS), has a limited portion. The railways has to extend it on a proportionate basis. The ~1.07 trillion is totally off-budget of which IRFC’S portion is more than ~65,000 crore, with the rest coming from PPP projects and other SPVS with state governments. So, more than 60 per cent of the off-budget amount is being contributed by IRFC towards funding the capex requirement of the railways.

The Union Budget presented by Finance Minister Nirmala Sitharaman on February 1 promised an expenditure boost — spending close to ~70 trillion in two years by budgeting for ~34.5 trillion in FY21 and ~34.8 trillion in the next fiscal year (FY22). Contrast this to the previous two years when the government spent ~50 trillion. This way, the FM set the intent for a massive borrowing-led expenditure stimulus.

But the fact is the level of spending in FY21 has been the same. This would mean a massive 28 per cent jump in spending in FY21, followed by a steady level of expenditure, without much growth. But there is a structural issue that severely limits the spending power of the Central government. Though this is an intrinsic part of public finances everywhere, its imprint on the finances of the Central government is such that it would be a mistake to neglect it.

Spending on unproductive and current heads such as salaries and pensions, interest payments, and subsidies — termed committed expenditure — will account for an unprecedented ~20 trillion in FY21 and ~18.8 trillion in FY22. This would leave only ~14.5 trillion in FY21 and ~16 trillion in FY22, for discretionary spending by the Centre. This translates into 7-8 per cent of GDP.

Funds can only be used from this, ranging between 35 and 45 per cent of the total, for capital expenditure (capex), social welfare schemes, and, most importantly, health and education.

Further, committed spending may not be limited to these heads, and include that on schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and transfers to states. This analysis thus considers a conservative estimate of committed expenditure.

Chart 1

To put the lion’s share of committed expenditure in perspective, and how it makes a bigger impact in a crisis year, let us look at the following numbers.

In FY21, the Central government will earn ~15.6 trillion as revenue from taxes and non-tax sources. But its committed expenditure is ~20 trillion. In FY22, its committed spend will be ~18.8 trillion against revenue receipts of ~17.9 trillion.

This means the government will use capital receipts, from disinvestment, borrowing from the market, and the National Small Savings Fund (NSSF), to first service its obligations on debt, salaries, pensions, and subsidies.

And only then will it get the room to spend on capex. Even then, priority flagship schemes such as the MGNREGS and cash support through PM-KISAN, gain precedence, because they are key instruments in the government’s rural thrust.

Interest payments are estimated at ~6.92 trillion in FY21, and ~8.09 trillion in FY22, forming 23 per cent of spending, and close to 4 per cent of GDP.

Chart 2

Subsidies have been pegged at a staggering ~6.5 trillion this year as the government plans to take up the arrears of Food Corporation of India on its own books.

This has compelled the Centre to spend ~4.2 trillion on food subsidy payment, which will be a direct cash outflow from the Consolidated Fund of India to the Food Corporation of India.

But subsidies are set to fall in FY22, estimated at ~3.7 trillion.

“If we set aside the reduction in subsidies, balance revenue expenditure is set to rise by ~2 trillion in FY22, more than half of which is driven by higher interest payments,” said Aditi Nayar, principal economist, ICRA.

To make possible discretionary spending including capex and that on welfare, the government decided to borrow more than planned in FY21 — ~12.7 trillion rather than ~12 trillion, but also announced that it would borrow more than the market expectation in FY22.

This was a strong signal to the markets that the government was willing to spend more even if the fiscal deficit rose to unprecedented levels. But this borrowing will exert a strong pressure on the debt to GDP ratio, and interest payments in the coming years, especially the next decade, said experts.

“With a higher fiscal deficit expected over the medium term, interest payments are likely to continue to rise, making the reduction in the size of committed items in revenue spending challenging,” said Nayar.

Salaries and the pension outgo, just for the Central government, remain 2 per cent of GDP. This inevitable and a big-ticket spending head also contributes to consumption in the economy, especially towards housing, consumer durables, and premium goods.

Adding the ones of the state governments, salaries and pensions would rise by more than two percentage points to go over 4 per cent of GDP. States spend about 5 per cent of GDP on committed spending, and just above 2 per cent of GDP on interest payments, in contrast to the Centre, which spends 4 per cent of GDP on just one head -- interest payments.

The passing of Major Port Authorities Bill, 2020, in the Rajya Sabha this week, paves the way for public sector (PSU) ports to vie with their private counterparts, mainly on the tariff front. Major PSU ports were hamstrung due to regulations laid down by the Tariff Authority for Major Ports (TAMP) that were not applicable to private ports.

“The government made it clear that TAMP’S role has significantly lessened. The reference tariff for PPP (public-private partnership) bidding would be set by the new board. Once a private player is in operation, it will have complete authority in setting tariffs based on market conditions. Thus, over time, once this mechanism becomes operational, TAMP’S future is uncertain,” said Ankit Patel, vicepresident and co-head, corporate ratings, at ICRA.

TAMP has been a multi-member statutory body with a mandate to fix tariffs levied by major port trusts under the control of the Centre and private terminals, therein.

This body fixes rates as well as the conditionality governing the application of rates.

“This Bill is going to create a levelplaying field not just between major and private ports but also between major port terminals and PPP terminals. This will lead to strong price discovery,” A. Janardhana Rao, managing director (MD) of Indian Ports Association, told Business

Standard. Within major (PSU) ports, PPP terminal players, too, have had to take tariff approvals from the TAMP. The Bill, however, eliminates taking approval from the body.

“Due to this, we are also expecting investment in PPP to go up at major ports in the coming years. Removal of TAMP will augur well for PSU ports, both in terms of earnings as well as investments,” added Rao.

DP World, Singapore’s PSA International Pte and Essar Ports, among others, are some of the PPP players having terminals at major ports such as Jawaharlal Nehru Port (JNPT) and Paradip.

“TAMP’S role dilution will give a big boost to the investment climate in the PPP segment. It had been a major hindrance for players. There will be renewed enthusiasm for new licenses,” said Rajiv Agarwal, chief executive officer (CEO) and MD of Essar Ports.

Meanwhile, analysts said the Bill does put some major ports in an advantageous position, going ahead.

“Larger ports with higher economies of scale – JNPT, Kandla, Vizag and Paradip would stand to benefit as they handle larger volumes. They have the possibility of attracting more cargo as well as investment,” said Patel. “Pricing war will now be market driven, entirely fair and in accordance with customer requirement, taking into consideration the cost parameters of ports,” added Agarwal.

Over the last decade, private ports have been increasingly eating into the cargo share of major ports, driving the latter to reinvent themselves to stay afloat. “Private ports have benefitted for a long time by the service quality and lack of flexibility at PSU ports. If the board (of a major port) operates with complete freedom, it would mean more competition for cargo. The new Bill could be of some worry to private ports,” said Patel.

The Bill also proposed a simplified composition of the board of Port Authority, which will comprise 11 to 13 members from the present 17 to 19.

A compact board with professional independent members will strengthen decision making and strategic planning. “A compact board with an appropriate mix should help efficiency at major ports, and in turn, push up competence,” said an analyst with another rating agency.

Provision has been made for inclusion of representatives of state governments, the ministry of railways, the customs department and the department of revenue as members in the board.

There will also be a government nominee and a member representing employees of the major port authority.

Though the new Bill addresses big hurdles that major ports have been facing, service quality and marketing are lacking at these ports as compared to private ones, said industry experts.

“Creation of a mechanism is not enough. Under the proposed landlord port model, the board that is created must use the autonomy granted to it. The board has to operate with freedom and take decisions to improve service quality, efficiency, land usage, asset-monetisation, tariff setting and dispute resolution, among other issues,” said Patel.

The financial results season is on. Listed Indian banks have been presenting two sets of numbers on asset quality. One, presented by adhering to the rule book as well as an apex court ruling. The other shows numbers, on prudential basis, termed as pro forma figures assuming the absence of the court ruling that bars treating defaulting loans as nonperforming assets (NPAS). The latter reveals a much clearer picture about the pain or stress on books.

What are pro forma NPAS? And why are they being disclosed as distinct from those shown in the income statement of banks?

Lenders are presenting asset quality profile by sticking to the rule that asks for accounts with 90-day overdue to be treated as NPAS as a prudent step. This is despite the Supreme Court of India’s interim stay on classifying such accounts (with 90-day overdue) as NPAS.

In September 2020, the Supreme Court barred banks from declaring any loan account as NPA until further orders, giving relief to individual and commercial borrowers. The court gave this interim stay while hearing petitions that questioned the charging of interest on loans during the six-month moratorium on repayments that ended on August 31, 2020.

In the income statement for the second quarter (September 2020) and third quarter (December 2020), banks have shown NPAS in line with the Supreme Court directive. Banks give pro forma basis figures in notes to income statement. An analysis of results declared by listed banks so far shows that the NPA figures shown in the bank income statements are lower than the ones earmarked on pro forma basis.

How does that impact borrowers? Can lenders begin face recovery proceedings? Does the borrower

get further credit assistance?

The assessment is done at portfolio level on the basis of borrower behaviour. So, borrower accounts are not being tagged as defaulters. Hence, the credit score of customers is not impacted till now. Those facing genuine difficulties in repayment will still be eligible for assistance like additional credit and restructuring to soften the blow and to be able to recover.

What is the character of pro forma NPAS?

This pool also covers some loans that are being restructured under regulatory dispensation to give relief to borrowers (retail, small and medium-sized enterprises, or SMES, and corporate) hit by the pandemic. Bankers say the pro forma slippages have a substantial chunk from the retail and SME segment. It is for the first time that banks are dealing with higher level of retail slippage due to job loss and, in some instances, closure of businesses.

The corporate loan portfolio has been stress tested for many years now, and lenders have taken steps to restructure, resolve and make recoveries. So, this time around, the share of corporate loans in the stress pool is expected to be limited.

Bankers say the pro forma slippages have a substantial chunk from the retail and SME segment

How is it being seen by the market and rating agencies?

Such disclosures and accompanying provisions are seen as proactive and prudent steps to fortify the balance sheets in some way for the impending asset quality deterioration due to the pandemic-induced economic disruption. The Reserve Bank of India’s Financial Stability Report has estimated that gross bad loans of banks in India would rise from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario. The pain could be higher with gross nonperforming assets (GNPAS) of 14.8 per cent in September 2021 under severe stress scenario.