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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Audio Gap]Dr. P.V. Ramesh, Chairman and Managing Director and Mr. Ajeet Kumar Agarwal, Director of Finance from Rural Electrification Corporation to discuss their Financial Year FY '18 Earnings. Over to you, sir.
Thanks, very good day to all of you, and thank you so much for taking your time off to be with us. Greetings to you all. As you are aware on 28th of May, the Board of Directors of REC, they have approved the audited financial results for the fourth quarter and also for the financial year 2018 and the board has recommended a final dividend of INR 1.75 per share. This is an addition to what was paid as an interim dividend earlier and which brings it to INR 9.15. And just to give you a brief overview of the highlights, and this year, we had sanctioned projects valued at over INR 1,07,534 crores. This compare to the earlier year is a growth of 28%, which was about INR 83,871 crores. And the disbursements the '18 financial year were about INR 61,712 crores, registering a growth of about 6% from the earlier. The total income for the year was INR 22,400 crores, a marginal dip from the earlier year of INR 23,800 crores. And profit before tax was INR 6,852 crores and profit after tax was INR 4,647 crores and the profit after tax the earlier year, which was the highest was INR 6,246 crores. And we had a loan sanctioned growth of 28% and loan book growth of about 19%. And compared to the earlier year, it now stands around INR 2,40,000 crores compared to INR 2,00,000 crores a year earlier. Now I would like to say 2 things about the Power sector and also mention about the NPAs about which many of us are concerned. Now let me first mention that the Power sector in India is now going through a major transformation as well as a transition. We -- as you know that the installed capacity in India now is about 344 gigawatts. This is primarily about -- 78% is in thermal sector. Now the demand is about 170 to 180 gigawatts, the peak demand. This demand is increasing -- the government has initiated 2 major programs: One for system strengthening in the Distribution segment and the other is the electrification of villages and the households. And as a nodal agency for the Government of India Major Power Sector Development Programs, I'm happy to inform all of you that the India has electrified all its villages by 28th of April and is poised to electrify all households, which is almost about 40 million, before end of this year. Of this, already 6 -- about 7 million have already been electrified of the 40 million. Now this is likely to have a major impact in terms of phenomenal demand increase for power, which is one of the major reasons also why there is a stress in the power sector. Now you are aware that about 40,000 megawatts of FX in the power sector, mainly thermal, are in the different stages of stress. Many of them are commissioned and are operational, but are yielding suboptimal revenues or have problems with the fuel supply or the power purchase agreements, which is really responsible for this segment. And REC has relatively less exposure to the private sector. Our total private sector exposure is about 14% of the loan book because our principal financing has been to the state utilities and where there has been no stress whatsoever. And coming now to the issue of the Reserve Bank of India's 12th February framework for resolution of the stressed assets, which makes no distinction between different sectors. It applied uniformly across, which gives 180 days to the lenders to find a resolution plan. It has extinguished all the earlier formulations for resolution of the stressed assets like the restructuring, debt restructuring and strategic restructuring, 5x21 and flexible structuring of the long-term project loans, [indiscernible] 48, et cetera. And also it's abolished the joint lender's forum, which was the platform for a joint decision making by the lender. So it basically gives 180 days, which started on 1st of March. Though this framework is not extended to nonbanking financial company like REC, we are a member of the consortium that have lent to these projects and you are well aware that the REC is not the sole lender except in minor projects. And in all these things, we are part of a larger consortium, primarily comprising of various commercial banks. So we have followed the same provisioning norms and -- that are prescribed in the 12th February circular of RBI, which is essentially responsible for the NPA upper end increase to gross of 7.15% and net of 3.14% -- sorry, 5.68%. And had it not been for the RBI circular, we would have remained at a gross of 3.14% and a net of 2.07%.So we are working with all the lenders, with government to find a sustainable mechanism for resolution of these stressed assets. We have several proposals in the pipeline, which we hope would be -- would enable us to resolve these assets. And I can also like to say that we have been proactive in terms of provisioning. We [indiscernible] that there would be further increase in the -- in fact, we expect at least 4 assets to become standard in the first quarter or latest in the second quarter. Yes, so in addition, we have declared a dividend of INR 9.15 per share of face value of INR 10. So friends, looking ahead, I think this has been the outcome, which has been sort of forced on by the circumstances. And I think the bad phase is behind us. We are looking forward to a very optimistic and robust growth. And I say this with all responsibility that we would continue to sustain this growth momentum. We have the sanctions of increase of 28% also is an indicator to the robust pipeline of the business for the future. We have signed a memorandum of agreement with several state utilities, essentially laying down the pathway and milestones for the next 5-year financing for the power sector development in the state. And this again across -- spreads across the value chain. The second important thing is our footprint in the Renewable segment is expanding, a sanction of about 9% and disbursement of about 7% indicate that our presence in the Renewable segment is expanding and though it remains at about 1% of the total loan book, it is likely to grow in the coming days. And we are also -- there could be some concerns about a marginal decline in the NIMs and the yields, but I must also say that we still are the best in the league. Number two, the NIMs continue to be closer to 4% and the yields are higher than 3%, and then we continue to be -- and this is by virtue of the adjustments that had to be made in response to the markets. But in the coming days, we are confident that we will continue to remain profitable, we will continue to have a much larger volume of business. And much more importantly, we will continue to remain -- retain our strategic edge vis-à-vis the power utilities both in the public and the private sector and also in the Renewable segment. So these are some of the broader issues I wanted to present before you and then request to Mr. Ajeet Agarwal, our Director of Finance to supplement me and then we are open to question and answers. Thank you. Thank you very much.
Good morning. [ Kunal ]?
Yes.
Shall we will go to Q&A straightaway because [indiscernible] has already covered the broader issues.
Yes. Sure [indiscernible]
[Operator Instructions] The first question is from the line of [ Shiv Kumar ] from Unified Capital.
Sir, can you give us the number of restructured standard loan assets, the breakup between public and private and the respective versions?
The provisions made out in our books in terms of the NPAs all pertain to the private sector. There is no project in terms of the state sector being declared in the NPA to date. So what our NPAs figures have been given, which is approximately INR 17,000 crores all belong to IBTs.
Sir, as we bring to the restructured standard loan assets, which were INR 21,200 crores in Q3, so what is the number in Q4, sir?
The restructure book is approximately remaining to be around INR 3,800 crores as against the figure we reported earlier. All these standard assets on the state sector, which was shown as INR 10,000 crores. There is one project still under restructured standard asset of INR 1,500 crores, which is a [indiscernible] joint sector project being taken by [indiscernible] and the railways. And in terms of the private sector, we have 2 projects under execution, which is [ Ngai ] and [ Endo ] petrochemicals in [indiscernible]. The total exposure in these 2 projects are approximately INR 2,000 crores. So this makes a total roughly around INR 3,800 crores. But as regards to figures furnished to you in the accounts cover the [indiscernible] which is also being shown as a restructured standard asset due to the subject is matter in the court of law, but the project otherwise as stands commissioned, and we are awaiting the final go-ahead in terms of the commencement of operations of RKM. And although these NPAs, which we have declared INR 9,500 crores, INR 8,000 crores worth of assets have been taken out with the restructured books of the private sector, which was 4 major projects of Lanco Babandh, Lanco Amarkantak, [indiscernible] and Amaravathi. These are the 4 projects, the 4 small projects have been taken out from the categories of [indiscernible] and [indiscernible], which are smaller in nature, which has an exposure of INR 1,400 crores, INR 1,500 crores, which involves Dans Energy, [indiscernible] and we usually ignite and the small one is -- yes, it just makes a total of INR 9,591 crores, which has been declared [indiscernible] lines of 12th February circular of 2018.
Okay. Sir so basically to summarize from the restructured standard book has come down from INR 21,200 crores to INR 3,800 crores as of Q4?
That's right. That is our standing, yes.
Sir, Ramesh sir was referring to a recovery of 4 assets worth, if I'm not wrong INR 4,000 crores in the morning interview. So what is the confidence that you're driving that this recovery will happen over Q1 and Q2?
I'll just give you a little bit of idea of these assets. The assets of [indiscernible] power, where we are the sole lender. We are in the last stages of negotiation with a onetime settlement. And hopefully, if we're to get it resolved then we should be able to recover the whole amount of debt in this asset. Number second project, which we have been referring to as Lanco Anpara, which is already a commissioned project and has been driving on last 5 years. This has resulted into the NPA category due to the non-settlement of the deals with the U.K. government. The issue has been taken up with them and the kind of response, which has been shown by in change of management, we hope that our debt component in this project shall remain intact, and we will not be able to take any haircut in this regard. The third project, which was referred as Prakash Industry, which is we have an exposure of INR 300 crores, which is already been put in there is a standard category. The provision will stand reverse next year because we are to still pass the restructured standard asset base after the project is there for more than 1 year. Another project -- 2 projects which we are looking very clearly is the Dans kenergy and [indiscernible]. Both have already been restructured under as DR, successfully implemented. And these projects were not having the PPA visibility with both these projects, which is a hydro project of 100 megawatts and have been successfully running over the last 2, 3 years. And we have been able to negotiate PPA at a very good terms around INR 4-plus with the utilities of Haryana. So there our exposure is almost totaling to INR 800 crores. So with these, we are quite -- these 4 budgets are having a low hanging fruit kind of issues, and we hope if everything goes well as planned out, we should be able to see that these assets go back to the standard category maybe 6 or 9 months from now.
Sir, can you repeat the outstanding for the first 2 projects, sir?
The first 2 projects, the factor is INR 511 crores and the Lanco Anpara is INR 1,250 crores.
Sir, any comments on the yields coming down? Do you think this is the [indiscernible] From now on should only improve, both the spread and the yield?
The yields have come down this particular year because the combination of 2 factors. First of all, the lending rates have been quite competitive in the market due to the banks participating in the past. And secondly, there have been some reversal of income due to the declaration of the NPLs in our books of accounts in line with the 12th February circular. And to a large extent, this has been compensated by the reduction in the cost of borrowing as you must have seen from the presentation that we have been able to reduce our cost of borrowing to 60 basis points on our overall outstanding. So as a result, this is net impact of 40 basis -- 40 to 50 basis points on the yields. Going forward, considering the market dynamics as of today and there is not much of a competition in the market, we hold that we should be able to pass on the lending rates to our borrowers in the coming time. And to all of course will be made to see that our cost of borrowing still remains as a most competitive level, and we are quite confident that we should -- from here now onwards the years must show an increasing trend.
The next question is from the line of [indiscernible] from Quantum Securities.
So a continuation of the previous answer. Sir, how much was the pressure on the yield on advances due to interest reversal for the year as a whole, if you can quantify that?
For the whole year, we have a reverse income to the tune of INR 1,465 crores.
Okay. And sir, going forward, how do you see, because of the interest reversal part alone, how much yields can improve going forward?
If I look at the last couple of years, most improved by 50 basis points at least going forward.
[Operator Instructions] The next question is from the line of [ Rajat ] from IDFC Securities.
Can you hear me?
Yes, you're audible. Please go ahead.
Sir, out of the total private book of INR 33,000 crores, how many -- how much of them are actually servicing the loans properly and there is no stress whatsoever?
The balance INR 15,000 crores are servicing our interest on due time, and we don't anticipate any stress as of today in these loans.
Sir, but do you think there could be any stress at all going forward in them? Or you think [indiscernible]
As the thing stands today, we don't anticipate any further stress [indiscernible].
All right. And sir, till quarter 2 of 2017, we used to give a slide in our presentation, where we used to talk about the provisions across all types of categories of asset like standard, restructured and [indiscernible]. What would be that number for FY '18 now?
We have those numbers with us. The total provisionings made out in terms of the contingent provisions on our standard assets and I'm talking of a year as a whole is INR 281 crores. And the provision for bad and doubtful debt, which we have created is INR 1,881 crores. Provisions of loans converted under the [indiscernible] guidelines was INR 29 crores. And we have made a provisioning because some of the assets, which have been shifted from the restructured standard asset in line with the 12th February Circular, we had existing provisioning and reversal of some of the asset, which have been restated as standard after completion in time of INR 777 crores have been reversed in line with the guideline. So the net provisioning, as you can see, is INR 1,415 crores.
Sir, this is the number for the -- this loan number for the current year. What could be the stock number of provisions, I mean, the total of all these kinds of categories of provisions?
The total provisioning is INR 2,500 crores? INR 3,600 crores. [indiscernible] As of today, you can roughly say INR 3,600 crores.
Actually, by the quarter 2 of 2017, it used to be more than INR 5,000 crores.
No, you're talking about the results under [indiscernible]. I think, it's -- if you take that, it will be still more than INR 6,000 crores. That figure I will give in 5 minutes time that the total provisioning made under [indiscernible]. We do have the figures. So that must be plus INR 6,500 crores or so. There's INR 3,600 crores is a total provisionings made on these books in terms of the active classification. On top of it, we have a special results created in terms of provisions for doubtful debts and other provisions in terms of the requirement of Reserve Bank of India. So if you take those as a provisioning coverage ratio, it is much higher. Those figures we should be able to give you in 5 minutes' time.
And sir, there was another provision -- some results created under Section 38...
That includes a worth of figure, which you have been referring to INR 5,000 crores, includes the provisioning under 3618, 17, 18.
The next question is from the line of [indiscernible] from [indiscernible] Advisors.
Just on the 6% of your book, which has been tested the utilities. Can there be a possibility of some NPAs coming from that the book?
No, I don't anticipate any such eventuality. We have been in this business for almost 50 years and we have been sanctioning and disbursement taking place in the power sector utilities owned by the state government. And you must have looked in the past that the scheme has been recently implemented. So wherever some stress was been targeted by the investors, they should be satisfied that under the REC still has got INR 43,000 crores of its outstanding with our discounts back. And a lot of discussions are taking place and discounts are showing a positive sign in terms of the implementation, in terms of the financial interest savings of INR 16,000 crores on a total utilities spread across India and the kind of laws subject to [indiscernible] entered into the state governments and then Ministry of Power Center. We hope there is still [indiscernible] witnessing 7, 5 years back, which was a concern of the investors is no longer as of today available in this system. So going forward, we don't anticipate any stress in the -- lending to the state sector utilities.
Yes. So basically if I understood verbally any state government or state [indiscernible] utility will actually carry a state government guarantee?
No, not really. I think it's less than 5% of our loans are guaranteed by the government. We don't -- the utility is rated on its own strength or its own financials and balance sheet. So depending on that, we decide on the project financing. So none of the utilities have defaulted and actually overall, if you scan the horizon across the country because we operate in all the states and union territories and mostly with all the utilities, their overall financial situation is improving. Maybe they're [indiscernible] To exceptions, where there may be delayed payment to the power suppliers, but not to the -- as far as our debt servicing is concerned, overall it's much more positive. I mean, just to give you a snapshot of what it is, I mean, the overall debt servicing burden of the interest loan is reduced by about INR 16,000 crores, as Mr. Agarwal has said, and the [indiscernible] Gap on an average of all the utilities has come down from what used to be INR 48 paisa to INR 28 paisa now. The collection efficiency has increased to 94%, building efficiency has increased to 84% and AT&T loss of sales have gone down from 44% to 19.8%. This is an aggregate level. It's quite possible that there are some which are lagging behind, but none have defaulted, and we have seen no reason at all. And [indiscernible] cost also is going down and all the utilities are following the merit order dispatch. So I mean I think there is a lot of positive things that are happening and just if you coupled with the investment of INR 1,00,000 crores that has being made under the [ Deendayal Upadhyay ] and distribution system strengthening, and this is not counting the money that is being drawn from us as loans. I think, overall investment in the distribution infrastructure and transmission infrastructure should really address many of the [indiscernible] that we see between the supply and demand gap and also the latent demand should get expressed. So you will see -- I do not believe that the utilities -- state utilities would have any problems.
Okay. Lastly, yes, sorry...
Okay, go ahead.
And lastly like the private sector [indiscernible] year. [indiscernible] INR 33,000 crores, of it, INR 17,000 crores is basically something, which is classified [indiscernible] NPA. So right in the previous question [indiscernible] what percentage of that has already been provided for [indiscernible] out of INR 17,000 crores, how much you have already provided?
Okay. I'll give you the figures now. If you look at our accounts as of today, already an NPA provisioning of INR 3,516 crores have been provided for. In terms of the provision for doubtful debts, which is [indiscernible] 3618 and 17. We have already made a provisioning of INR 2,761 crores. This adds up to a total of INR 6,277 crores. Then we have a standard asset provisioning of [ 5.4% ] is INR 889 crores and the balance still remaining in [indiscernible] in some of the projects, which are still continuing, we have a provision INR 464 crores. So this makes a total of INR 7,630 crores. So all the provisioning on this account is INR 7,630 crores.
Okay. And what you mentioned was at Lanco project, the [indiscernible] project and the other one.
[indiscernible]
Yes. All 3 put together, that was put into [indiscernible] crores.
Yes.
So roughly like that is something, which you expect will come back in Q1 or Q2?
[indiscernible] so we are driving the whole process, and we are quite optimistic we should be able to resolve. Already standards are, the provisioning shall get reversed next year, but we are in the last stages of negotiating settlement and Lanco Anpara we don't anticipate any kind of haircut, which has been already 10% has already been provided for in Lanco Anpara also by declaring these NPAs because issues of the payment is lying in their [indiscernible] by the UPPCL, but nothing comes to it and we might approach to [indiscernible] in the Lanco Anpara case and we are quite hopeful we should be able to recover that [indiscernible].
And lastly, in terms of the dividend, the rate at which the dividend has been given currently going forward since we are expecting performance improvement, do you expect some improvement in that dividend or the same level?
We will try to see the -- we maximize the stakeholders' wealth, and we work in that direction, and we will continue to work in those directions. And hopefully, yes, there will be some additions in the dividend going forward.
[indiscernible]
Sir, my first question is what is the outlook on the growth front on the [indiscernible] and the margin front?
Growth on -- could you please repeat the question?
What is the outlook on the growth front? How do you see the disbursements and overall loan book growth for the next fiscal year?
[indiscernible] as we just mentioned the kind of order pipeline we have in place, and we have been showing a growth of 19%, and we are now working at the pace of INR 2,39,000 to be precise. So going forward, we are targeting 10% to 15% of growth on incremental basis on larger base. As on the NIMs -- and the NIMs and the yields, what we are trying to see that we will try to improve those because there have been certain segments in terms of reversal of income and concerning the fact that we will be worked on a larger base. There is a good chance the NIMs and the [indiscernible] getting improved.
And going forward, how do you see your credit cost panning out?
I think as far as the credit cost is concerned, we have already provided for the chunk of these kind of assets, and we shall be compliant to all those provisioning norms in terms of the Reserve Bank of India guidelines. So wherever incremental provisioning required to be made, we will continue to provide. And this year also all-in total, we made a provisioning of INR 2,000 crores on the books of accounts. And I don't think there will be any need [indiscernible]. Even if we continue to [indiscernible] the same level of provision going forward, our other parameters should improve.
Okay. My last question is on the asset quality. You have mentioned that around INR 4,000 crores recoveries expected in Q1, but how do you think full year ending FY '19, where do you see your gross or net NPAs [indiscernible] recovery from other [indiscernible] also?
Most projects are likely where we do not have the majority stake in the lending, and we are not the lead financials in most of these projects. So ultimately, it depends on the resolution plan the bankers put in place, and for that deadline is 31st of August. Lot of projects are like in the case [indiscernible] auction route and hopefully the quote should be received by June this year. And going forward if the [indiscernible] plans are not in place, it has to be taken to [indiscernible] but most of these projects are already commissioned and have become NPAs because of the nonavailability of full PPA in planned load sector. So in terms of those lenders' expectations [indiscernible] may or may not be very detailed in these things. So it all depends how the resolution plans move ahead and how the demands [indiscernible] in the country improves. So it is a difficult thing to answer right now to make an assessment. Yes, we can make an assessment on those projects where we have the lead and we have the things are moving in the right direction. So that is the reason that we have given you a figure between INR 3,000 crores to INR 4,000 crores of assets could be revised very soon because we are in the final stages of negotiations.
But does revision of this INR 3,000 crores to INR 4,000 crores would be expected in Q1? Or it can move to Q4?
We are taking a minimum 6 months' time because you know all those legal issues. So hopefully, by the second quarter or third quarter, where we can see some positive response [indiscernible].
The next question is from the line of [indiscernible] from Jefferies.
Couple of questions. First, as you mentioned that because of [indiscernible] within the 6 months or 1-day default case are something, which you need to recover. Can you let us know the quantum of that asset for your overall book?
So as per 12th February Circular, we have provided INR 9,591 crores in terms of those guidelines. If any resolution plans takes place in these assets then the only question 1-day recovery shall come in. If these assets might be either put to NCID cases or can [indiscernible] resolution plan before 31st of August.
True sir, but these are the ones which are stripped from the restructured categories, but even those which are not restructured, but they fall under 1-day -- if they default by more than 1-day. So then also you need to keep a watch on it and recover it within the 180 days?
No, I don't anticipate any further stress on these account in our books of accounts other than adding those [indiscernible]
[indiscernible] Apart from these, which are defaulted for more than a day. Okay. So you said KSK and a few of the names, so there must be some assets, yes?
KSK is already classified as NPLs in our books. All those INR 8,000 crores, INR 9,591 crores which we have referred. INR 8,000 comes from the restructured book and the balance comes from those gains, which are already implemented as [indiscernible]. So that makes a total. So this will be assets, which [indiscernible].
Beyond the current NPL and the restructured INR 3,500 crores, which you said, there are no assets which have defaulted even for a single day at this particular moment?
Yes.
We'll take the next question from the line of Amit [indiscernible] from UTI Mutual Fund.
This 31st August deadline, can you explain what exactly is this? And this deadline pertains to NPL assets or restructured assets or 1-day default assets? And have the banks, who are leading these assets, already declared as NPL or yet to declare as NPL?
So if you look at the circular 12th February 2018, as they have done all those cases -- most of these assets were having a standstill period under those [indiscernible] or SDR. Since they were not servicing the loans, the Reserve Bank of India has come out with the guidelines 1st of March 2018, these all assets will be taken stock by the lenders. And if they are not making the payment, they will be all classified as NPLs in the books of the lenders. Now they further have added, you have 180 days starting from 1st of March 2018, where the lenders can put in a resolution plan on their own. In terms of those that time limit of 180 days, we are counting from 1st of March, that will be ending on 31st of August. So this window is available to all the lenders to discuss among themselves and agree to a resolution plan. If these lenders fail to agree to a resolution plan, which is not to be supported by 100% of the lenders considering the fact that DLF has already been discontinued. Now all the lenders, which are part of the consortium lending have to agree to resolution plan being put in place. And if this should be completed before the 31st of August. If any of these assets, which have been classified as NPL and no resolution plan is put in place before 31st from August by lenders among themselves, then within 15 days on 31st of August, that is the 15th of September, we have no -- the lenders have no choice, but to refer it to NCLT. So this has put a lot of pressure on the lenders and the borrowers to avoid the NCLT route, they are agreeing to [indiscernible] resolution plan, mainly consisting of a sustainable debt. If all the lenders agree, yes, it could be put in place, otherwise it will go to NCLT.
What is the quantum of loans, which are to be provided for resolution plan till August 31 from a sector point of view?
We don't have it right now a figure from the sector's point of view though all the lenders have been meeting very regularly in this direction, and the all onus lies on the lead of each of these projects. The lead [indiscernible] the lenders meet, deciding the proposal, if there's any proposal is in hand either from the borrower's perspective or from any other borrower in the market, this is discussed there. Because these projects which have been mentioned, REC is not leading many of these projects [indiscernible] the first 3 we mentioned is Lanco and [indiscernible] and Prakash Industry, otherwise REC is just a consortium partner with all of the lenders. So we do not have that kind -- though we do participate, but most of these assets are being discussed on the resolution plan. You must have heard of the SBI has come out with a [indiscernible] plan, where we have to talk to all the lenders and then they have 10 to 12 assets have been identified by SBI, where the sizable amount of exposures, where all of the lenders do have an exposure and the things are started moving [indiscernible] the -- for kind of ratings are being worked out in order to establish what kind of sustainable debt these projects may have. Based on the sustainable portions, the lenders might agree to a particular plan of action. So it is in a very initial stages of discussions, and we are quite optimistic than some of the projects, which have a good PPA and flexibility in terms could see some resolution plan with the lenders.
Just to understand, what is your exposure in this deadline related to resolution plans?
Close to INR 7,000 crores.
So you have your understanding of the INR 7,000 crores, who are the other bankers in the INR 7,000 crores exposure. So if you add up all the bankers in these assets, what would be the overall system exposure of this INR 7,000 crores.
These INR 7,000 crores are different lenders [indiscernible] in some cases. Lanco [indiscernible]
Sorry to interrupt you, sir. What I was trying to understand is INR 7,000 crores is your exposure. What is system-level exposure of these loans because you will have the exposure of the entire asset right?
[indiscernible] INR 7,000 crores, you can say REC exposure is aiming 10% to 15% on a ballpark figure you can -- as around INR 50,000 crores of exposure all put together.
And most of this is classified as NPL in your books?
Yes. All are classified.
The next question is a follow-up from the line of [indiscernible] from [indiscernible] Capital.
Is it possible to name these accounts, which are -- private accounts, which are servicing properly?
Yes, we can. Give you a list if you can just wait for a minute. Yes, we will come back to you later.
We'll come back to you. You can [indiscernible] the other questions. We'll read out those. Not an issue.
I just have one more question. Bad book of around INR 17,000 crores on a ballpark basis, what would be the haircut that you would expect in the next couple of years by you resolving all the issues?
As I told you, this is a very difficult estimate to be made at this juncture because some of the projects which we referred INR 3,500 crores kind of assets, which we are looking at. And if these -- [indiscernible] the way the action plan is going on as of today, we feel that these assets, which have already provided to the extent of 20%, 25% and in some cases 10%, 30%. We don't see any kind of [indiscernible] required as far as these assets are concerned. On the rest of the assets, it all depends on a project of parameters so it is difficult to read out and give you a complete rate as of now because all those projects are in different stages of -- most of them are completed. Some have the [indiscernible], some have part [indiscernible], some have [indiscernible], some are banking only the goal to be taken from [indiscernible] option. So it all depends, which level these projects are placed. Some are [indiscernible] power plants, like [indiscernible] was supposed to supply [indiscernible], but it's a commissioned project, a very well good project lender of [indiscernible]. If you name [ Lanco ] [indiscernible], which has 4 units almost commissioned that's a good visibility of INR 5 plus and all assets availability. So only the question of downsizing once we have reached, which we could not get it through reserve bank as of today because of project was supposed to be of 6 units. So if you look at the 4 units [indiscernible], they should attract a very good value in the market even if today, if we have the open option process. So all these projects are wherever we see visibility not there, REC is provided accelerated provisioning like [indiscernible] 90% is already there [indiscernible] 40%. If [indiscernible] reverses income in his provisioning. So these things can be discussed next time when we have one-to-one meeting, we have all the details with us, but it may take us almost 2 hours to give you a complete brief on each of these projects. So we can come to the Bombay next time and [indiscernible] meet with all the details and on a one-to-one basis on a group of people who's a interface could be shared with you the latest update on these projects. As to your first question that you state what are the projects, which are servicing [indiscernible], which as you mentioned the [indiscernible], [indiscernible] Hydro, [indiscernible] power, [indiscernible] project, [indiscernible] power, [indiscernible], DRM, and [indiscernible]. So all those assets are performing totaling to around INR 8,000 crores to INR 9,000 crores, and the balance exposure [indiscernible] all are performing. And [ Gazan ] it is also performing in terms of those guidelines [indiscernible]. [indiscernible] 2, 3, 4, 5, major projects we have exposure to INR 7,000 crores to INR 8,000 crores are in the different stages of resolution. [indiscernible] the smaller projects, which have been completed and have a [indiscernible] visibility. We hope that this could be revised. And some of them are still having a INR 2,000 less of an exposure -- less than INR 2,000 crores so there we may [indiscernible] also.
Sir, do you think would you need any fund, fresh funding requirement for you in the immediate future?
No, fresh funding in terms of aborting or?
Equity.
Equity, we don't anticipate any initial requirement for next 2 to 3 years. Today, we are having a capital adequacy of 19.5%, where we have around 17% last year and 2.5% and Tier 2 is the kind of growth projections we are guiding 15% to 20% going forward let's say, 15% the kind of loan book and the network we have I don't think the next 3 years we should be requiring any further equity [indiscernible] .
What do you think debt equity [indiscernible]?
Debt equity, presently we're working at 5.6%, and we are permitted to grow by 10x of the reserve Bank, but we are never crossed a limit of 7% to 7.5% to 8%.
The next question is from the line of [indiscernible] from [indiscernible] Securities.
Sir, you mentioned some other scheme of SBI, there have been 10 pieces about it in the newspaper. Can you give some more color?
As well as we just understand though we are not much in those projects, which have been referred to under the [indiscernible]. What the -- the gist of [indiscernible] scheme learns like that. The assets, which have as you say the project parameters in terms of the PPA and of FSA linkages available and they've all commissioned -- first of all, they're all commissioned projects, number one. Secondly, they're not able to service a loan in terms of their [indiscernible] visibility. So where the bankers and the lenders, mainly the bankers have come forward to work out on what this -- this is basically [indiscernible]. It is as to work order sustainable debt in terms of the revised guidelines, [indiscernible] which says, give the minimum rating to be assigned [indiscernible], which needs to be done by independent credit rating agencies. So all the lenders where as we and other bankers, including REC PFC have an exposure in all commissioned projects [indiscernible] by the lead in these such cases to the rating agencies to get the sustainable debt established first based on the [indiscernible] rating, which gives an indication of the sustainable debt based on the devaluation will be decided for. Assuming the sustainable debt is much lower than the provision of the lender as of today in terms of the guidelines, there could be a different issue [indiscernible] refer it to [indiscernible]. The first idea is to get the sustainable debt of these projects established through the mechanism of [indiscernible] under these present guidelines of [indiscernible]. So this exercise is on in some of these 10 to 12 projects, which have been identified. Luckily our REC is not in any one of them, except [indiscernible] which we are taking care of otherwise. So based on those ratings [indiscernible] when we attend a meeting next 15 to 20 days from now, we should have a fair idea of what kind of sustainable debt the lenders are comfortably placed with.
And also [indiscernible] and this is it?
No, it is not there.
Okay. So would you have a list of accounts, which are there in the [indiscernible] scheme or just [indiscernible]?
We are not there, but we can give you some references not to be quoted by you. The [indiscernible] is one, [indiscernible] power [indiscernible] [ Lanco ] [indiscernible]
Sorry, [indiscernible]?
[indiscernible]
[indiscernible] is which one?
Power Ventures.
The next question is from the line of David [indiscernible] from [indiscernible] Private Limited.
Sir, if you could give us a flavor on the prepayments that happened in FY '18?
There has not been many prepayments in FY '18 for us, barring 1 or 2 smaller projects in the renewables, because they are changing hands, so based on prepayments have come to us because we understand the Hindustan Power has sold out their renewable assets to -- we understand to [indiscernible]. So we had put in exposure in that, some of those projects, but there's some small repayments have come in, not to a large extent.
And this number would be under control in FY '19 as well? [indiscernible]
I don't anticipate any prepayment in terms of how the things are placed today. So the small repayments have done due to the major acquisition under variable energy segment.
Sir, my next question is pertaining to the funding required [indiscernible] to meet the energy requirement by FY '22. Give us some light as to where REC will be standing and how would REC's share [indiscernible] would look like by FY '22?
What's the question? [indiscernible]
We understand that there is a huge funding requirement to meet the infrastructure required for the power sector by FY '22. And to meet the [indiscernible] demand my 2022, where would -- where do you see REC standing in terms of meeting the funding requirement for the power sector? How much share do you see REC accounting for the funding?
It should be -- we should be a significant player because I mean, let me say 2 or 3 things. One is the major investment needed in the distribution and the transmission segment and that's where we have the large market share, we are the major player, we have almost 80% share in the distribution segment. And we have a substantial stake in the transmission. So we would have anywhere between 60% to 70% there and the generation segment again, they projected once a year -- projected that in between 2018 and 2026. The investment needed in the generation segment would be to the tune of INR 18.5 lakh crores and obviously substantial requirement would be in the renewable segment and renewable segment would be almost about INR 10 lakh crores. So that's again where we have a substantial presence. So even if you consider on a conservative estimate at 30%, 1/3 share in the generation segment and 60% in the [indiscernible] segment, then you get a sense of what it is like.
So do we see the share of private sector growing in REC's outlook?
No I think it might diminish because there are no new [ IPPs ] coming in at the moment except in the renewable segment and we -- I mean certainly the proportion of the renewable segment would grow in absolute terms as you can see from the FY '18 because the sanctions were 9% of the total sanctions and about 6. odd percent, 6% to 7% were disbursement, the renewable segment, but as you see as the loan book grows, as a proportion of the overall loan book, it may go up to about 3% to 4%, and we hope that it would be 6% to 8% in the longer term. So overall, the private sector proportion is unlikely to grow actually, it's likely to diminish as part of the overall loan book and particularly since bigger investments are being made in the distribution segment, both as a counterpart, financing to the government programs and as an overall investment per se because in order to reach out to these new villages, new households and the new demands that are emerging both in the urban and the rural areas there would be a lot more investment flowing in there.
Sure, sir, my third question is pertaining to the provisioning. The provisioning coverage ratio has come down in FY '18, we understand because of the February circular in the last quarter, there were lot of assets that were recognized as [indiscernible]. But do we see accelerated provisioning happening on these accounts in FY '19? Or would it be at...?
It depends on the case-to-case basis, as in [indiscernible] we have been providing an accelerated provisioning in the past and wherever the requirement is considered to be providing for an accelerated provisioning depending on the state of the each of the project, we definitely -- management would definitely taking care of these provisioning requirements. And as of today, the provisioning cover, as we just mentioned we still have a total provisioning of INR 7,630 odd crores and again a INR 17,000 crores today in terms of the total asset provisioning. I'm not talking simply [indiscernible] provisioning. The other kind of provisioning [indiscernible], which could be utilized for these purposes. So we are still 40%, otherwise, but going forward as your question is for the specific to NP provisioning, yes, definitely, we shall be considering on a case-to-case basis wherever required an accelerated provisioning but then what is required.
Because this number has come down to about 20.5% in FY '18, I was [indiscernible]
There are 2 reasons for it. Number one, [indiscernible] analysis. We have to clear an NPL to them as of the 31st of March '18. So as per the RBI norms, we have to provide 14%. In other cases where the NPLs [indiscernible] if they continue to be [indiscernible] another 1 year or so then this provisioning will be going to be 20%. And we do provide to unsecured portions [indiscernible] and we are not hiding anything in terms of the provisioning requirement numbers. And secondly, these assets, like some other assets do carry 90% provisioning, some do carry 50%, 30%. So these are the new additions to the NPAs in terms of the 12th February Circular and considering those assets have now been classified as NPLs as we just mentioned for the benefit of all, we will be reviewing these projects on an individual basis and wherever we see there is a need for providing an accelerated provisioning, we should definitely provide it for it.
[Operator Instructions] The next question is from the line of [indiscernible] from [indiscernible].
Sir, just wanted to get your view on the NIMs that you said that you'd look to improve the NIMs from here on just for the reverse of that happened in Q4. Given the way the interest rates are moving up, how should -- how easy it would be to retain the NIMs at current levels?
We hope that considering the rates are going up and both the sides, it's not the only cost of borrowing and we have been in past adopting all kinds of strategies we have in order to reduce our cost of borrowing and you could see from the results declared that REC still has the lowest cost of borrowing as compared to peers. So this is, of course, will continue to be made by us and times to come also. As regarding the lending, part, yes, we used to feel some competition from other lending institution mainly from the bank. And as of today REC has been predominantly in power and we have been in this business for almost 5 decades, the major churn comes from the state utilities also. And we hope that some of the lending side we should be able to pass on to our borrowers, which we could not do in the last 1 year or so.
So what percentage...
Sorry, to interrupt Mr. [indiscernible] but we need to move on to the next question. The next question is from the line of [indiscernible] from. [indiscernible] Capital.
How has been the competition from banks in terms of maintaining your spread?
As we just mentioned, [indiscernible] demonetization there was initially for the liquidity in the market. And as the things have progressed and the banks have felt the heat of the power sector and infrastructure lending and there is a matter of fact decided to keep themselves away for the time being the power sector. I'm not talking simply the [ IPPs ], but traditionally as we have seen our loan book comes from 95%, 80% to 90% from the state utilities, we have never felt any stress. And we have been in the direct touch with these utilities, we know the ins and outs of those businesses. And we're quite comfortable that debt portion of 90% will ensure robust growth going forward. And we are there to support them, and we're also trying to educate and talk to them one-to-one that this is what the market is [indiscernible], cost of borrowing does behave and similar thing has to be passed on to them. So we hope that considering the 90% focus on the state sector. We should be able to improve our margins going forward.
Can I squeeze in another question, if it's okay?
Actually, we need to move to the next question. The next question is a follow-up from the line of [indiscernible] from Unifi Capital.
Sir, this is regarding the restructured standard assets of -- from the public sector about INR 8,506 crores at Q3, sir, looks like you updated this entire Quantum. What is the rationale for that update, sir? [indiscernible] public state structure start at INR 8,506 crores at Q3?
So almost [indiscernible], which has been restructured, I think the provisioning, which we have reversed is on INR 333 crores. And this is in line with the guidance. So INR 300 crores of provisioning, which was existing in these projects to be precise INR 323 crores -- INR 323 crores have since been reversed.
[indiscernible]
[indiscernible] which is under [indiscernible] which is [indiscernible]. And there is still 1-year time to complete and we are quite optimistic that should be completed within the [indiscernible] time. So that 5% provisioning, which is still around INR 100 crores or so -- INR 70 crores, INR 80 crores shall stand the worst maybe hopefully by the close of the financial year. [indiscernible] it will be commissioned and it may be because of provisioning it could be next year. Yes.
The next question is from the line of from [ Jay Shah ] from [indiscernible] Group.
Sir, sometime back you talked about lending to railways and other sectors, any progress on that area?
Lending to railways, we are engaged in discussions with various entities not only in railways, but also in other agencies. So this is an ongoing process.
So would we see any diversification in FY '19? Or this could take longer time in terms of diversification out of the public sector?
We certainly hope they would be diversification, we are working continuously on the space, I hope that would be -- our portfolio would get much diversified, would have a much larger client base and larger partnership. And that's the whole purpose -- the purpose is really to diversify our project portfolio. Just to sort of supplement just to clarify, there are new initiatives that are emerging from different [indiscernible] and also from the center, like the energy solarization of the irrigation pump sets, energy efficiency devices, not only at the domestic in the retail front, but also in the irrigation sector. So these are areas where there is a -- we are really at the forefront of supporting that. And then we dedicated green corridor for evacuation of the power from the renewable segment is another area where we are working closely with our partners and the state government and the state utilities. So we are also have a plan for strengthening the capacity of the distribution companies. We have the national institute for power management in training in Hyderabad. We are strengthening that Institute in order to strengthen the state utilities. We're also partnering with multilateral and bilateral agencies like KFW World Bank and Asian Development Bank for both parallel financing and also counterpart financing to the state government. So these are some of the areas going beyond -- and then there are new technologies electric vehicles which some of the states particularly the transport companies are promoting the urban areas and some of the metropolitan city, charging infrastructure, these are areas where we are continuously exploring new business opportunities.
Ladies and gentlemen, due to time constraint, we will be taking the last question from the line of from [indiscernible] from [indiscernible] Ventures.
Yes. Sir, can you just give us some clarity in terms of what would be the incremental stress that would still remain in the books?
As of today, we don't anticipate any further stress. I think we have provided for all which are under stress and going forward as we just mentioned the rest of the asset, which are in our portfolio are servicing their dues on time and they have all those project parameters -- they're all commissioned projects and the restructure [indiscernible] simply indicates only 2 projects, which are also being under control and [indiscernible] and commissioned and we have been [indiscernible]. These are the 2 projects we should be [indiscernible] from now. So as the things stand today based on our inputs from the field, we don't anticipate any further stress on the ongoing projects.
Let me also supplement this because, I mean, there is an impression that these -- we don't put out all the information out in the public domain, I mean, whatever [indiscernible] made provisioning for everything. So and these are assets I mean one needs to clarify that unlike in the other sectors many of these assets are already commission projects, some of them or many of them are functioning much, however, it is some optimal level either the revenue stream is suboptimal so they are not able to service the debt, or there's no PPA, no FSA, or there's a partial PPA or a partial [ FSA ]. So each one of these is unique. What we are doing in REC is we have set up a stress management unit to be have engaged the services of experts, we have taken asset-by-asset analysis, we have worked out a resolution potential proposal for each one of them. We are working with our counterparts as well-known as has stake in each of these is less than 15% of the total there are many other lenders in the same segment. So we do not believe that these things could go any worse than what they are at the moment, they can only get better. And we are working on a sustained basis and there is an entire expert team, which is working on this to see how to really retrieve them and salvage them. We're also working on a plan with the other financial institutions and the Government of India for alternate model for resolution and revitalization of these assets. And if that works and that would open up new Vista for quicker resolution of these assets. So these things can get only better, I think, the worst is behind us.
Sir, so basically, if you are saying that we are looking at INR 4,000 crores of upgrading happening in this financial year maybe Q3 or so. What is the percentage of provision that we carry for that? And hence where do we see the net NPA by the closure of this year?
It depends on the project-to-project basis, like the, [indiscernible] we have talked, still part of it has been reversed like in the books and the 10% will stand the worst maybe another INR 25 crores. If the factor already had 30% provision has been made out in our books, which is around INR 170 crores. If that proposal goes through then we should be recovering our principal plus reversal of kind of the provisioning of INR 170 crores on account of [indiscernible]. As of today and [indiscernible] have made a provisioning of 10%. So assuming that everything goes well there will be no requirement of incremental provisioning and [indiscernible], which is approximately INR 125 crores. INR 800 crores to INR 900 crores of assets, I think, 20% provisioning is already made 20%, 25%. All put together in this are INR 3,500 crores of asset, minimum 20% provisioning on an aggregate basis existing in our books.
So basically, we are saying that we could exit FY '19 with a net NPA less than INR 10,000 odd crores given assuming provision remains at the same level as FY '18?
That is what our target is because these are projects, which is we are talking with the entities we are the lead and we are having a substantial portion on balance 2, 3 projects. The rest, we are not having much of an exposure. Yes, and we are working in that directions. So hopefully, we should be.
Last question from my end would be the growth that we [indiscernible] of 10% to 15%, here it's purely from the power sector, right? There is no of diversification benefit that is also impacted in here?
No. At the moment, [indiscernible] when we talked about 12% to 15% growth projection, that is at the power sector, but it will be a bonus for the diversification and the expansion.
Thank you.
So friends, in conclusion -- any questions, anymore?
No, sir, we don't have any questions now.
I just want to thank each and every one of you, who have taken your valuable time off to be with us and asking us these [indiscernible] probing questions. If there is any still doubts left or if there any clarifications that are required, we would be very happy. We'll put out every information that is possible. We put out over information in the public domain that you would like to know. You can get back to us individually either myself, Mr. Agarwal or any of our colleagues, Mr. [indiscernible] Singh at any time. And thank you very much for your support, and we look forward to -- this continuing dialogue and interaction, which [indiscernible] is really to improve ourselves and be more responsible to our shareholders and to collectively get the best both for the shareholders and the country as a whole. Thank you very much.
Thank you.
Thanks a lot for your time, and thank you for all the participants for your participation. Thank you, and have a good day.
Thank you, [ Kunal]. Thank you all, friends. All the best.
Thank you. On behalf of [indiscernible] Securities, that concludes this conference.