Public sector banks cutting exposure in completed infrastructure projects

Reeling under the weight of bad loans and infrastructure-heavy loan portfolios, many public sector banks are increasingly ceding their exposure in completed infrastructure projects to lenders with relatively stronger balance sheets.

By doing so, banks with high levels of infrastructure loans can reduce the concentration risk and use the funds released to expand retail lending as well as step up the provision coverage for bad loans.

Once such loans are out of their books, their proportion in the overall loan portfolio will come down, thereby automatically rebalancing the portfolio.

Further, this will alleviate pressure on capital being faced by the ceding bank while the bank refinancing the loan will get to expand its portfolio of relatively secure loans.

For example, out of State Bank of India’s ₹27,585-crore incremental growth in large corporate loans in the July-September quarter, almost ₹12,000 crore was by way of refinancing.

A senior official said that during the reporting quarter, SBI refinanced projects, such as Dhamra Port, Udupi Power and Adani Power. ICICI Bank, HDFC Bank and Axis Bank were among others competing for refinancing completed infrastructure projects, he added.

As of September-end, SBI’s large corporate portfolio stood at ₹2,83,549 crore.

Refinance refers to replacing an existing loan with a new loan at better terms.

The SBI official said once a project gets completed, developers can avail fresh loans, which are 1 to 2 per cent cheaper than the existing loans.

The official explained that “once the project completion risk is done with, there is a high possibility that the developer may want a better pricing based on cash flows. So, many lenders will want to wade in. They will try to get a good (loan) share in it.

“Banks know that cash flows will be there, they will have an escrow mechanism, all that will be in place. So, it becomes a much more secure advance. Therefore, they will have a better profile of the advance itself,” the official said.

Elaborating on the growth in the large corporate loan book, SBI Chairman Arundhati Bhattacharya, at a recent media briefing, said, “Some of the (large corporate) loan growth came from refinance, some from infrastructure but not from new projects. New projects still are few and far between. Basically we have brought in accounts which were not with us. They were with other banks. So, we have taken portions of those.” At a recent media interaction, the newly appointed MD & CEO of Bank of Baroda PS Jayakumar, said there are some immediate priorities, including managing non-performing loans and enhancing credit quality, that his bank needs to address.

“Connected with that is to rebalance our portfolio. It means that we diversify the customer base we have got and also be able to get customers whose performance, especially loan performance, is going to be superior to what we have today.”

While emphasising that his bank is interested in pursuing loans only where it can have a long term profitable relationship, the BoB chief said participation in syndicated transactions or being a small part of a (loan) consortium is not its strategy.

“The principal aspect is we are here to serve our customers for the long term and it is those customers that we must seek.

As far as large corporates are concerned, we have to define our target market and we have to reach out to those customers as opposed to getting customers through the door through a variety of intermediary processes,” he added.

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