As growth capital dries up from public sector banks, private financiers are stepping in to lift industry out of its rut. Expect more announcements of acquisitions in the future, Pawan Agrawal, Chief Analytical Officer, Crisil Ratings, said in an interview to BusinessLine . Edited excerpts:

I think everybody was taken by surprise when Nirma announced it would be taking over the Lafarge cement assets?

I think it was surprising because Nirma is a lesser known entity in the cement business. But from a deal perspective, I think we will see more of these coming. The pace will depend on how much of a valuation mismatch there is; as lenders, how much are banks able to push companies to sell? But the external environment is very conducive for these deals to happen. The equity market is strong, the outlook for interest rates has become better than what it used to be, and we have seen more progress in infrastructure and policy-related matters — all of this put together, there is hope that deals will happen. But again, this has been our expectation for a year and a half at least, we expected a certain pace and that didn’t happen, for whatever reasons. I think you should expect that pace to pick up, but the form depends on whether it’s a strategic investor, or whether you are able to do an IPO.

There are estimates that in FY17, companies will need refinancing of nearly ₹2 lakh crore. Where will this come from?

In the infrastructure business, with projects which are complete and generating cash, you see refinancing happening from banks, from the corporate bond market, through credit enhancements, partial guarantees, infrastructure debt funds – there’s a whole range of options. But this isn’t happening with projects under construction or for companies which are under pressure, which is why we’re seeing more defaults and slippages now.

Doesn’t that become a vicious cycle then? Because banks are unwilling to lend to exactly those companies that need liquidity infusion?

It’s not unwillingness but the inability and caution in lending for banks, because of their internal challenges. If you put yourself in the bank’s position, would you put more money in a project that will only hopefully turn around in the next two-three years? I think that will be tough. And they aren’t able to lend because very clearly, the focus of public sector banks is recovery and profitability, unlike in the past when growth was the objective. The government stance is that “I will be there for you to meet capital for regulations, but if want to grow, please find your own capital.” So you will lend only to projects capital which are already doing well.

So where will these companies go for funding?

I think there will be higher participation from private financiers such as private sector banks, foreign banks and NBFCs. If you look at the trend, it’s something that’s becoming clearer by the day. Also, the corporate bond and commercial papers market will step in. If you look at private sector banks, capitalisation is their key strength, they are profitable and the price-to-book value is high and they can raise capital. In the last 1.5-2 years, lots of them have raised capital. Typically, private sector banks have better developed credit and risk assessment process.

NBFCs are coming into the retail and loan against property (LAP) market, particularly for SMEs unable to get bank funding. Here. the promoter mortgages his property, and unlike with a term loan which matures in 3-5 years, for LAP, you have up to 12 years, so the incremental cash outgo every year is lower. We’re also seeing SME specialised lenders coming into the market.

In which sectors do you see ratings improving?

It’s too early to say, but the steel sector, after the imposition of minimum import price, is improving faster.

Whether this will sustain post withdrawal of MIP and in what manner is a key aspect. In commodities, prices have reasonably stabilised, and auto components are doing well because auto sales have recovered well and they are seeing some pick-up in exports. Textiles is mixed picture, we’re seeing some of them do well and some not so good.

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