PFC, REC score over state-run banks
These two term lenders are more profitable and have reported faster growth in advances than listed PSBS
Term lenders Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) have shown better profitability and reported faster growth in advances than listed public sector banks (PSBS) such as State Bank of India, Bank of Baroda, and Punjab National Bank.
PFC and REC have come into focus as Union Finance Minister Nirmala Sitharaman in her Budget announced plans to set up a development finance institution or term lender to finance infrastructure projects.
The combined advances of PSBS were down 2.4 per cent in FY20 when adjusted for their mergers and they reported losses.
PFC’S advances were up 10.2 per cent in FY20 while REC reported a 15.4 per cent jump in the last financial year.
There is, however, only a marginal difference between PSBS and these two lenders in terms of net non-performing assets (NNPAS) or bad loans adjusted for provisions.
PSBS’ NNPAS of 3.7 per cent in FY20 were better than PFC’S of 4 per cent and marginally worse than REC’S 3.5 per cent last financial year.
PSBS together reported a loss of ~8,370 crore — an improvement from a net loss of ~57,835 crore a year ago.
However, PSBS as a whole have reported losses in four of the last five
years due to large provisions for bad loans.
PFC, on the other hand, reported net profits of ~5,665 crore on a standalone basis in FY20, down 18.7 per cent, while profits reduced 9.3 per cent in FY20 to ~1,645 crore.
Most PSBS, however, have reported a sharp turnaround in profitability during the first nine months of FY21,
thanks to a decline in bad loans and provisions. It’s the same for PFC and REC. PSB’S combined loan book declined to ~56 trillion at the end of March 2020 from ~57.43 trillion a year ago. The figures for FY19 include the numbers of six smaller PSBS, which merged with their bigger peers beginning FY20. Similarly, State Bank of India’s figures have been consolidated
with its associates, which were merged with the parent subsequently.
In comparison, PFC’S loan book (on a standalone basis) grew to ~3.34 trillion at the end of March 2020 from ~3.03 trillion a year ago.
In the same period, REC’S loan book grew from ~2.7 trillion to ~3.12 trillion. In the last five years (FY1520), PSBS’ loan book grew at a compound annual growth rate (CAGR) of 1.3 per cent. In the same period PFC grew its loan book at a CAGR of 11 per cent while REC reported 13.7 per cent CAGR growth in its loan in the period.
PFC and REC are under the administrative control of the Ministry of Power and provide long-term finance to power projects, including transmission and distribution projects.
However, the bulk of the projects they fund are in the public sector. Together PFC and REC are singlelargest financiers of power projects in the country.
In March 2019, PFC acquired the government’s stake in REC.
Experts say it’s not financial performance but asset liability mismatch which is the issue.
“Project funding leads to an assetliability mismatch for banks because they borrow through deposits with a tenor of three years or less. In contrast the pay-back period for most infra projects can be as long as 20 years,” said Madan Sabnavis chief economist, CARE Ratings.
This makes funding large infrastructure projects unsuitable.
Dhananjay Sinha, head (research), Systematix Institutional Equity, said: “The asset-liability mismatch leads to liquidity problems for banks when lending conditions become tight. As such banks are reluctant to get involved in projects with long gestation periods.”