‘Credit rating system for power sector will benefit existing big players only’

The ministry of power has mooted the idea of introducing a credit rating system for power sector to make lending to the sector more organised and safe. However, HD Khunteta, CMD of Rural Electrification Corporation (REC), says the rating system on the lines of European countries will make it difficult for the state sector companies to borrow money because of their bad financial condition. DNA spoke with Khunteta on many other issues. Excerpts from the interview:

The ministry of power has mooted the idea of introducing credit ratings for power projects...Could you please tell how this will work and help a lender like you to improve your loan quality?
The idea is excellent. In fact in the other developed countries, the rating of the borrower is being done but in our country, it is possible only for existing developers like Tata, Adani, Lanco to get good ratings, but for new players who are setting up their first power project it would be difficult due to various reasons like coal supply, signing of power purchase agreement, etc. The coal ministry has allocated a number of mines in the no-go area, so although this idea is very good, there are some practical problems for the new entrants.

Can we say that for the new entrants the cost of interest would be high?
Your point is right. In the case of companies that have good ratings the interest rate would be lower and for those companies with average or below average ratings, the cost of borrowing would be high. But then, this rating procedure should not be limited to only the non-banking financial institutions and should be followed by banks also so that the competition is balanced between the two types of lenders. But the introduction of ratings will certainly make the cost of setting up power projects costlier because the interest burden accounts for between 8% and 10% of the project cost. So, higher interest cost of the projects will ultimately increase power tariffs in the country.

What would be the interest rate difference for a company with a good rating and the one with a lower rating?
In Europe, even the companies with ratings of AAA have defaulted. The yield on the bond has increased to 10%-12% because of some defaults. But if you take our example, we are rated BBB- at par with the sovereign ratings. We have recently gone to the international market and got funds at 250 basis points over US treasury. This was one of the best also. So, normally the difference between a borrower with an excellent rating and one with a good rating is about 100-150 basis points. But in case of a default the yield on the loan increases in the secondary market.

Do you think that the new rating system will benefit only a particular type of borrowers?
Well, if the ratings system is introduced, let me tell you, it would be very difficult for the state sector projects to get funding. Look at the financial health of the state electricity boards. In the private sector the benefit will go to the Tata Power because they have got better rating, but for Reliance Power the rating has come down. Most of the players will not get excellent ratings despite the fact that they have completed their projects on time.

Coal deficit in the country is hurting the thermal power plants in the country and the ministry of power has warned of some defaults in loan payment by developers. Are you prepared to face such a situation? Have any of your debtors defaulted on loan payment?
So far none of the companies have defaulted, and this issue of coal is being taken up by power and coal ministries. Since the matter is so much highlighted, we hope necessary steps will be taken by the ministry of coal and Coal India to increase the supply of coal so that the projects that are being commissioned could at least operate at a plant load factor of 85%.

Many power developers had placed orders for equipment but they have not been given any coal linkage. How will you manage such a situation where your debtor has taken loan but has not got fuel linkage?
We have not sanctioned any loan where coal linkage has not been given. However, we have sanctioned loan on the basis of the letter of assurance (LoA) by Coal India Ltd with the hope that CIL will honour its commitment. Even CIL has said that they will sign fuel supply agreement (FSA) only after 50% completion of the project.

But are you not taking any precautions in case CIL does not provide coal linkage to these companies?
We have already taken precautions at the time of the sanctioning of the loan and we do not disburse the money unless the coal supply is tied up or at least the LoA has been given to the company by CIL. We also have a condition of having environment clearance for the project before sanctioning the loan. So, I think we have sufficient measures to reduce the risk involved in a project.

So, you do not fear any defaults given the current situation of coal projects in the country?
We have a strong system, in certain projects we even take the state guarantees, where we think it is needed for the mitigation of risk. I do not think that the states can afford to default on loan repayment, because in that case they will not get power from NTPC, and NHPC and banks will not make them the payment. I think it is a vicious circle that the states would not like to enter into.

What is your repayment cycle of loan?
We sanction a loan for a period of 13 years with a moratorium of 3 years for the principal amount. The interest payment is made by the company on a quarterly basis even during the construction period.

What is your gross non-performing assets (NPA)?
Our gross NPA stands at Rs20 crore and net NPA Rs2 crore on a loan book of Rs81,700 crore.

Have any of the states or private sector developers asked for restructuring of loans till now?
In the last four years, only two private sector companies have asked for restructuring of loan. The amount was Rs275 crore and  Rs72 crore, respectively.

The interest rates in the country are hitting the roof once again.

How will it impact the power sector and your disbursement targets?
The increase in interest cost has affected project cost by only 2%-3%. Higher interest rates persist only for a period of 6-12 months. The same scenario had occurred in 2008-09, when the interest rates had gone up to 14% but later on it came down to 7%-8%. So I don’t think this will continue on a long-term basis, and ultimately the rate of interest has to settle down in the range of 10%-11%, which is good for the REC as well the power developers.

What is your current cost of borrowing and net interest margins?
Currently it is at 7.85% on the total borrowing of Rs70,000 crore. The net interest margins are at 4.40%.

You are going for overseas borrowing to reduce the cost. How much are you saving on the interest cost in the international market?
Out of $1.2 billion that we borrowed overseas, $500 million has been hedged and there we are saving 300 basis points compared to the domestic market. In case of the $500 million syndicated loan and the $200 million bond issue we have not hedged. So the cost of that money is much lower.

Do you think the cost of hedging may increase the cost of borrowings in future?
Even if we go for 100% hedging, the cost of fund overseas would be 8.5% against the domestic rate of 9.6%. So, overseas borrowing is cheaper in all parameters.