RBI should carry out an in-depth analysis and review of the present NPA definition and its associated rules.

- Sunil Kanoria

Vice Chairman, Srei Infrastructure Finance Limited

A high-powered committee with representatives from the government, RBI and industry may be set upto look into the global best practices and evolve NPA norms suitable in a developing nation like ours, states Sunil Kanoria, Vice Chairman, Srei Infrastructure Finance Limited. In an exclusive interview with the Construction Times, Kanoria suggests what needs to be done to reboot the activities in the infra sector. Excerpts from the interview…

1To what extent the pandemic has impacted the infrastructure domain and what is your assessment on the short/medium term?

Construction has been one of the worst hit sectors due to the pandemic. Large numbers of migrant labourers depend on construction in real estate and infrastructure sectors. Their exodus due to the sudden imposition of the lockdown had affected construction activity severely. Although with the lifting of the lockdown, many of them are coming back to the construction sites, the pick-up in activity has been slow. In the infra sector, as it is construction activities slow down with the onset of monsoons, which coincided with the gradual lifting of the lockdown. I hope November onwards, construction activity will improve, but it will be modest. The pace of activity is expected to pick up faster once the projects under the National Infrastructure Pipeline (NIP) start getting implemented.

Are there any green shoots visible after the announcement of the stimulus packages/RBI's rate cuts on the project financing segment?

The stimulus packages announced so far will do little to spur investments. Whatever positive data about economic activities we are getting to hear now - most of it is a combination of pent-up demand and the festive season. Until and unless this positivity is sustained in the subsequent months, this talk about 'green shoots' may be premature. We must understand that the lockdown has resulted in job losses and closing of enterprises. I believe that a sustainable revival in consumption demand will be possible only when an infra stimulus is announced where government has to do the bulk of spending. There is talk in government circles of focusing first on short gestation infra projects. It is government spending on these projects that may open up entrepreneurship opportunities, and will induce the private sector to invest as well. All the schemes announced so far to make money available to the people will then start delivering the intended benefits. More people will get jobs and will have money in their hands to spend.

What are the key continuing challenges which you foresee impacting the economy as a whole and in the project finance sector post easing out of lockdown in stages?

One major problem associated with infra projects is the delayed payments. Whether it is a government department or a public sector undertaking or even bigger private enterprises, when it comes to making payments to the contractors and small-time operators, payments get inadvertently delayed. Much of the distress of the bulk of these small-time infra players can be solved if the payments are released in time. This is something which both the central and state governments must address urgently.

Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance?

One roadblock regularly experienced in the highways sector is that far too many arbitration awards do not get honoured. The cases get unnecessarily dragged to higher courts and take months and years to get resolved. This makes the arbitration process almost ineffective. Government must instruct the individual ministries to address this matter in order to restore the sanctity of the arbitration process.

What further measures / reforms should be undertaken by the states / central government and in which areas, to facilitate a healthy growth of the economy that may enhance the fund flow for projects?

The above are some low hanging fruit that the government can certainly aim for. Re-starting stalled infra projects stuck in various litigations, or as mentioned above, honouring arbitration awards, or releasing tax dues and outstanding payments - these can have an immediate impact. As on August, there were some 298 projects worth almost Rs. 11 lakh crore stuck in various stages of implementation due to a number of unresolved issues. What is perplexing is to understand what is possibly stopping government from re-starting these projects.

Futher, labour reforms undertaken by some state governments is a positive development. To ensure that more funds flow into the infra sector, both central and state government must ensure compressing the pre-implementation time. Far too much time is wasted in getting various clearances and approvals. What this country needs is a mechanism of 'deemed approval' - every clearance and approval should have a fixed number of days assigned to it within which the concerned department or ministry has to take action, failing which it should be 'deemed approved'. This will boost investor confidence and more funds will surely flow in.

What is your take on the government move encouraging the financial institutions (FIs) as eligible bidders for the infrastructure projects?

I see it as a positive development. Due to the accommodative monetary policy followed in most developed countries, right now too much low-cost funds are out there, and they are on the lookout for decent returns. This is the ideal time to attract such funds into our projects. We need funds, these international fund operators need returns - thus we have a perfect dovetailing situation. We need to present them shovel-ready projects that will certainly help bringing in more investments.

Any other area of improvement in terms of policy making you can think of when it comes to infrastructure projects?

One infrastructure-specific issue I can think of is about the definition of NPA. Right now the number of days of 'payments due' is the yardstick for calculating NPAs, and that yardstick is same across asset classes which, according to me, is quite absurd. Surely, an infra loan cannot be the same as a car loan or a house loan. The complexities involved in an infra project is far more. I feel RBI should carry out an in-depth analysis and review of the present NPA definition and its associated rules. For that, a high-powered committee with representatives from Government, RBI and industry may be set up. The scope of this committee would be to look into the global best practices and evolve NPA norms suitable in a developing nation like ours. For example, it would be prudent to explore how the US practice of defining an NPA as per the ticket-size of the loan can be replicated in India. To arrive at a more inclusive and practical definition of NPA, more factors may be taken into consideration like underlying asset value, future cash flows, collateral value, loan ticket-size, borrower's order book size and repayment history, borrower / borrower group's other exposures and repayment history.

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