Money & Banking

Why Srei is quitting the infra funding business

Bloomberg February 5 | Updated on February 05, 2020

Srei Infrastructure Finance Vice-Chairman Sunil Kanoria   -  Business Line

Srei Infrastructure Finance plans to stop financing Indian infrastructure projects after three decades in the business, as a slowing economy and crisis in the NBFC sector dries up funding lines.

The International Finance Corp-backed firm will, instead, focus solely on financing purchases and leasing of equipment, said Vice-Chairman Sunil Kanoria. Srei has tied up with eight banks that will fund 80 per cent of each project, while Srei will finance 20 per cent, reducing Srei’s need for capital.

“We have understood India the hard way,” said Kanoria. “We have realised that infrastructure is a government job. India being a socialist economy, we should let the government do it.”

Srei’s decision, at a time when Prime Minister Narendra Modi is banking on private companies to contribute a quarter of a planned $1.5-trillion investment pipeline, highlights the pain non-banking financiers are facing 17 months after the collapse of the IL&FS Group. Construction of roads, ports and power plants is seen as key to revive an economy growing at the slowest pace in a decade since the failure of the shadow lender.

At the time of IL&FS collapse, Srei’s equipment finance business was at its peak, adding $210 million of assets each month, said Kanoria.

However, a few days after it won regulatory approval to list Srei Equipment Finance, the government seized Infrastructure Leasing & Financial Services, triggering panic among mutual funds that had been providing credit to NBFCs, which then spread to the stock market. Srei’s shares have lost about 80 per cent of their value since then. Srei cut headcount by 32 per cent to 1,500, though it may hire as many as 200 employees for the equipment operation.

“Post the IL&FS crisis, access to funds is limited and access to capital is virtually not there,” said Kanoria. In the year through September 2019, Srei’s infrastructure lending book shrank 33 per cent while its equipment book dipped about 7 per cent.

A string of government, regulatory, and court decisions have also impacted the infrastructure sector and Srei’s business, including the cancellation of permits to mine coal, higher fees imposed on telecom companies, and long arbitration for road disputes.

Arbitration cases

“There are arbitration cases going on for several years,” said Kanoria. “When government does not pay, they expect you to pay on time. And if you don’t pay then you are branded as a non-performing asset and a crook.”

Still, the distressed valuation of infrastructure assets is attracting some investors. Deutsche Bank is offering to buy the debt of an Indian power producer at a discount of about 70 per cent, according to people familiar with the matter, while Varde Partners said its looking for opportunities to invest as financiers struggle.

Finance Minister Nirmala Sitharaman said last month that lenders were finding it tough to take decisions on concern that agencies would investigate them for impropriety, and added that authorities would differentiate between genuine commercial failure and criminal culpability. She has also blamed the Opposition for instigating street protests against a new citizenship law based on religion.

“We had an economic challenge, now we also have a social challenge for the last three months. Is there any investor who will come?” said Kanoria.

“We don’t want to be in infra. That’s a very clear message.”

Published on February 05, 2020

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