IDFC has not been able to really provide a concrete guidance as we would have liked given that this is something that you will appreciate that we have been developing as we were going along in terms of the plan for the Bank and what it implies from a Balance Sheet and cost perspective.
So keeping that background in mind, I just want to talk a little bit more about the asset quality related and provisioning issues and what we plan to do? Given the overall context, we have been saying for some time now that we want to try and protect the Balance Sheet of the Bank from all known risks that exist that we have been talking to you about for the last several quarters, depending on the progress on some of these issues from our Government perspective or from a regulatory perspective.
I want to just begin by saying that from a macro standpoint while we do see potential pockets of growth from the road sector, the power sector in particular coal and gas-based power plants and issues surrounding those plants remain unresolved. There are pockets of activity in the renewable sector as well; particularly in solar where there seems to be a lot of enthusiasm in participating in bids for solar projects. We have been discussing the power situation in the Country with you for the last couple of years. As you are aware approximately 40% of our loan book is in this sector and issues relating to this sector are quite well-known and they relate largely to fuel, tariff issues, PPAs and the state of distribution companies. Unfortunately, as I said, the risks remain unresolved despite efforts of developers, financiers and the Government partly because of the complexity of issues involved. There are several projects where tariff issues remain unresolved and are in various stages of judicial process where there has not been any clarity on tariffs for power plants.
The coal mine cancellation by the Supreme Court and subsequent auction by Government resulted in aggressive bids by developers in order to secure the operating mines that they were counting on for their economics. Also, there is uncertainty surrounding how these negative bids would be passed through into tariffs. As we have mentioned even in the last quarter that this has caused enhanced risks for such coal-based projects with couple of developers having already approached the courts for a resolution and it is unclear at this point in time what the outcome of not only those cases but more broadly speaking what would happen to the negative bids. We are aware that the Government since has have already issued an advisory to the regulator stating that they should be capping fixed costs. Which means that these negative bids would not be allowed to be passed through in tariffs in which case obviously the economics of these power plants and the viability of these power plants get compromised.
Likewise we were also awaiting the resolution of stranded gas-based assets.The Government came out with a framework, if I recall in April which then resulted in subsequent bidding by developers for gas which happened only in May.The outcome of that unfortunately is that when you analyze the framework while it is a start, it is far from sufficient to service debt and make these projects economically viable because at this point in time the way the framework has been structured it fires these plants at only about 35% PLF and is based purely on imported LNG. So the viability of these plants will obviously require availability of sufficient gas at reasonable prices and the off-take of power to fire these plants at 70% PLF. The current framework is not sufficient to even service interest and it is being done on a rolling four month basis where developers have to bid for gas with a finite subsidy for only first two years. This is a start as I said but by no means does it give any kind of comfort that it is a permanent solution or a long-term solution for gas-based plants.
The state of the discoms I think has been spoken about for several years and decades and that continues to remain challenging. The state of Discoms has deteriorated, there is not enough power being purchased by Discoms despite the Country being short of power and so that is another level of challenge that generating companies would face where despite being able to generate we are not quite so sure that there is going to be enough off-take of power in the economy.
So now given this backdrop, obviously we have strived very hard and despite our best efforts, as we said before, we cannot be immune to all the risks facing the power and the infrastructure sectors particularly given that IDFC is categorized as an infrastructure finance company and that by definition restricts our ability to diversify the lending book away from infrastructure into other parts of the economy. That obviously has been one of the reasons why we decided to proceed down the Banking path to not only diversify our asset profile but also over time diversify our liability profile, given that right now we are in a framework which is quite restrictive as an infra finance Company.
Also as we told you over the last several quarters, given our transition to a Bank we’re focused on making sure how the Bank is protected against all known risks that exist on our Balance Sheet. I want to once again reiterate that the stock of problems has not changed. We have been talking about these problems with you for the last several quarters, surrounding the coal assets and gas assets. So that continues to be the case. There have not been any incremental problems that have cropped up and as I said in the past largely on account of the fact that there are hasn’t been any kind of incremental new project development activity and we do have a good understanding of what the stock of problems has been for several quarters now. While we were hopeful that the risks surrounding these assets would reduce before we become a Bank, unfortunately this has not happened based on what I have just outlined earlier in terms of risks surrounding coal and gas assets. As Sunil articulated earlier, the volume of our net restructured assets, NPAs and Security Receipts as of June 30, 2015 was about 8.4% of our loan book. Almost 80% or potentially slightly higher than that relate to the coal and gas based assets that I talked about surrounding fuel issues or tariff issues
No comments :
Post a Comment