With the Infrastructure Finance Company (IFC) status being granted to it, REC gets a competitive edge as lending exposure to the private sector has gone up to 25%. In addition, REC becomes eligible for issuance of Infrastructure Bonds and for raising funds up to $500 million through External Commercial Borrowings (ECB) in a year.
However, the company still faces a significant downside potential as the top 10 customers account for 80% of the loan disbursed. Operating in the power sector does have drawbacks, as deadlines are rarely adhered to in power projects, which affects timely payments; and ironically, SEBs are the major culprits. Power Finance Corporation (PFC) is the immediate competitor of REC. It was meant to disburse loans to the generation sector earlier while REC was concerned with the T&D segment. As requirements increased, they both have got into each other’s ground. REC’s five year average return on assets and return on investment stand at 2.58 and 2.71 respectively, while the same for PFC stands at 2.84 and 2.97 respectively (Reuters). If you look at REC’s profile, T&D comprises of 51% of the loan book. On an incremental basis, lending towards the generation segment is higher in H1, FY ‘11 which accounts for 59% of the incremental disbursals. There are signs of stiff competition with banks in the T&D segment as banks are also offering competitive market rates due to their access to cheap deposits. Indeed, REC has been quite proactive in tapping cheaper sources of funds in India and overseas in the last year. Foreign currency loans increased to Rs.56.91 billion in FY 2010-11, a mammoth growth of 840% y-o-y (post IFC status). Truly, continued access to low cost funds, monitoring of client spreads and retaining competitive lending costs will remain the key to ensure that REC’s numbers stay healthy in the tougher and more competitive times ahead.
However, the company still faces a significant downside potential as the top 10 customers account for 80% of the loan disbursed. Operating in the power sector does have drawbacks, as deadlines are rarely adhered to in power projects, which affects timely payments; and ironically, SEBs are the major culprits. Power Finance Corporation (PFC) is the immediate competitor of REC. It was meant to disburse loans to the generation sector earlier while REC was concerned with the T&D segment. As requirements increased, they both have got into each other’s ground. REC’s five year average return on assets and return on investment stand at 2.58 and 2.71 respectively, while the same for PFC stands at 2.84 and 2.97 respectively (Reuters). If you look at REC’s profile, T&D comprises of 51% of the loan book. On an incremental basis, lending towards the generation segment is higher in H1, FY ‘11 which accounts for 59% of the incremental disbursals. There are signs of stiff competition with banks in the T&D segment as banks are also offering competitive market rates due to their access to cheap deposits. Indeed, REC has been quite proactive in tapping cheaper sources of funds in India and overseas in the last year. Foreign currency loans increased to Rs.56.91 billion in FY 2010-11, a mammoth growth of 840% y-o-y (post IFC status). Truly, continued access to low cost funds, monitoring of client spreads and retaining competitive lending costs will remain the key to ensure that REC’s numbers stay healthy in the tougher and more competitive times ahead.
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
