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Business News/ Industry / Banks cautious on refinancing infrastructure firms’ bad loans
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Banks cautious on refinancing infrastructure firms’ bad loans

Any delay in refinancing loans could increase the burden for already stressed companies, warn experts

There are fears that RBI’s 5/25 scheme could be misused to mask bad loans. Photo: Pradeep Gaur/MintPremium
There are fears that RBI’s 5/25 scheme could be misused to mask bad loans. Photo: Pradeep Gaur/Mint

Infrastructure firms are lining up to refinance their loans under the so-called 5/25 scheme introduced by the Reserve Bank of India (RBI) last year, but banks are yet to approve such requests as they await clarity from the regulator on some aspects of the scheme.

Besides, with at least a quarter of loans restructured over the past few years turning bad, bankers are also cautious about which projects to consider for refinancing under the scheme.

In July 2014, RBI introduced the 5/25 refinancing scheme to let infrastructure firms borrow for longer periods which match the life cycle of projects. The scheme, initially intended for new projects, was extended to existing projects of 500 crore and above in December.

Refinancing under the scheme could amount to about 80,000 crore in 2015-16, rating agency Crisil Ltd said in a report on Tuesday.

Banks, however, are yet to approve any of these applications. One problem is RBI’s condition that banks must ensure that the net present value (NPV) of the loan remains the same before and after the refinancing, so that banks don’t have to take a haircut. In order to meet this condition, banks must charge a higher interest rate, which may not be acceptable to borrowers.

“RBI has prescribed that the NPV of the loan extended to an infrastructure project should remain the same before and after the refinancing. To maintain the NPV, the borrower would have to agree to an increase in interest cost. We are still in discussions whether this is the best way forward," a senior official at a public sector bank said on condition of anonymity, as he is not allowed to be quoted by the press.

NPV is the difference between the present value of cash inflows and outflows.

Adani Power Ltd, Jaiprakash Power Ventures Ltd and Jaypee Infratech Ltd are some of the infrastructure firms in talks with lenders to refinance some of their debt under the 5/25 scheme but are yet to get final approval, according to bankers directly involved in these talks.

On 3 February, Mint had reported Jaiprakash Power Ventures was in talks with two banks to refinance loans worth 10,000 crore under the new scheme. Jaypee Infratech is in talks with banks to refinance a 6,600 crore loan taken for its Yamuna Expressway project, two bankers directly involved in the talks said.

An email query sent to officials at Jaypee Group on Tuesday seeking confirmation on the refinancing discussions remained unanswered. A spokesperson for Adani Power declined to comment on the refinancing talks.

According to an investment banker with a domestic bank, discussions are still in progress and different banks are taking different approaches. While some are refinancing loans under the scheme by adding a premium to the existing interest rate, others are awaiting clarification from RBI, he said.

Some bankers also say they would like to take a selective approach towards refinancing under the scheme. There are fears that the scheme could be misused to mask bad loans, as highlighted by Crisil in the report cited above.

“Structuring under 5/25 (~ 80,000 crore in FY16) can mask true picture of asset quality," said the rating agency, adding that it expects 15% of these loans could turn bad. Banks have in the past struggled with upgrading restructured loans. About 40% of loans restructured in the 2011-14 period turned bad, noted Crisil.

“Unless these stranded infrastructure projects start generating healthy cash flows, banks will have to continue this financial engineering at regular intervals. Fundamental issues of demand, fuel, regulatory approval, contract disputes need to be addressed," said Debasish Mishra, senior director (consulting), Deloitte Touche Tohmatsu India Pvt. Ltd.

According to a second banker, who works with a public sector bank, issues such as these are being used to assess and decide whether long-term refinancing is necessary at all. Banks have just started assessing these requests and approvals are likely to come over time, said the banker.

Experts, however, say a delay in refinancing could increase the burden for already stressed firms.

“Many existing power and infrastructure projects are currently in the second cycle of the project life of between six years to ten years. This is a period where the risk involved goes down allowing for a lower interest rate. However, any delay in refinancing these loans would mean unnecessary additional high interest burden on these companies," said Vinayak Chatterjee, chairman of infrastructure consulting firm Feedback Infrastructure Services.

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Published: 13 May 2015, 12:54 AM IST
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