REC aspires to become top NBFC

Rural Electrification Corporation, a dedicated power sector lender, remains bullish on credit off-take despite growing concerns about the fuel security of power projects and the poor financial health of state power distribution companies. The rising interest rates have also not hurt the company’s outlook. Its positive sentiments are supported by the robust growth in credit off-take in the current financial year. REC has logged a 15% growth in its disbursements in the first six months of the current financial year over the same period last year.

“There is a 15% growth in our credit off-take in the first half. We disbursed R11,600 crore compared with R10,191 crore in the corresponding period of the past year,” HD Khunteta, chairman and managing director, REC told FE.

While loan sanctions of REC have been slower in the first half, the company expects to round off the year with a decent growth rate in sanctions. The company sanctioned loans of R33,270 crore in the first half compared with R33,425 crore in the year-ago period.

“Sanctions in the first half are lower because our board did not meet during September. Our overall sanctions would be higher,” Khunteta said.

REC sanctioned loans worth Rs 65,000 crore during 2010-11. “We expect loan sanctions of Rs 70,000 crore this year. We have loan proposals that will be put up before the board soon”, Khunteta said.

But the company's costs of borrowings are rising and so are its lending rates, following the hikes in key policy rates by the Reserve Bank. The company's cost of capital for outstanding borrowings of Rs 75,000 crore works out to 8.15%. But its current cost of borrowing is at 8.72%, which may further increase in the coming months. “We expect the cost of borrowing in the current year to average at 8.75%,” he said. The company's current lending rate is upwards of 12.25%.

The only point of revenue recovery for investments made in the power sector is distribution. But power distribution companies are in a bad shape owing to non-revision of tariffs. The combined loss of state discoms is estimated at R74,000 crore as of March 2009.

However, the REC chief is not alarmed at the worsening financial health of discoms.

He believes that the situation will start improving soon.

“Seven states, including Rajasthan and Delhi, have already increased tariffs in recent weeks. Others like Tamil Nadu and Uttar Pradesh, where discoms have incurred high losses, might follow the suit,” Khunteta said.

The RBI has recently asked banks and non-banking finance companies to be cautious while sanctioning loans to the discoms. This is expected to put pressure on the states to allow tariff increases.

“We are asking discoms how they are going to meet the gap in their expenditure and revenue. Besides, we are also putting a condition that the state government will clear payments of outstanding agriculture subsidy to discoms in two-three tranches. States have to go ahead with power reforms,” he said.

While the company is concerned about the fuel crisis facing the power sector, it hopes that the situation will improve soon. Fuel is a major issue. Many generating companies are not buying power from plants where the generation cost is higher. However, things should improve in a year or so.

“We want to become the number one company in the NBFC space and maintain the quality of assets,” Khunteta said.