With few takers for credit in a dull business environment, Syndicate Bank has undercut other lenders to edge itself into the consortium for Reliance Infrastructure’s Mumbai Metro project and head it.
With few takers for credit in a dull business environment, Syndicate Bank has undercut other lenders to edge itself into the consortium for Reliance Infrastructure’s Mumbai Metro project and head it. The public sector lender offered a sweeter deal, sources familiar with the development said, to become a member of the consortium.
The consortium has agreed to refinance R1,650 crore of project loans given to subsidiary Mumbai Metro One (MMOPL), Reliance Infrastructure said in a BSE filing on June 11.
However, there was no mention of Syndicate Bank having taken over as the lead bank from the larger IDBI Bank. Interestingly, Syndicate Bank proposed to lead a consortium that offered a lower rate of interest at 11.75%, closer to the its base rate of 10%.
It also offered a generous extension of the tenure that helped it clinch the lead bank status, two sources familiar with the matter told FE.
Reliance Infra said that the refinancing of Rs 1,650 crore has resulted in extending the repayment tenure by 22 years to 2037 and that the interest rate stands reduced to 11.75% from 13% annually. The average maturity period of loans has almost doubled to 14 years, according to the company.
While acknowledging that infra projects are typically of a long gestation and that the 5/25 scheme is aimed at easing cash flow pressures, a couple of banks are concerned that easier terms of lending — longer tenures and lower rates — may not be pricing in the risks adequately. Moreover, bankers are also miffed with companies moving to lenders offering better terms and ‘dumping’ them at a time when cash flows are picking up and the tough execution period is over. But they’re getting accustomed to such practices. “Undercutting is now the norm, it’s the way business is being done,” a senior banker said.
The Rs 4,000-crore metro project — the first of its kind in Mumbai — was financed by a consortium of nine lenders led by IDBI Bank during the execution phase. The other bankers in the consortium are Canara Bank, State Bank of Hyderabad, Corporation Bank, Indian Bank, Central Bank of India, Oriental Bank of Commerce, Karur Vysya Bank, Bank of Maharashtra and India Infrastructure Finance Co (UK), according to MMOPL’s website.
A senior official in Reliance Infrastructure said that given the lower loan rates available in the market today, the company could negotiate for a better deal. The official added that the refinancing of loans frees up capital for operational requirements.
Banks have trimmed their base rates after Reserve Bank of India (RBI) governor Raghuram Rajan expressed concern over lack of transmission despite the central bank cutting repo rate three times by 25 basis points each since January 2015, bringing it down to 7.25%. Currently, ICICI Bank, HDFC Bank and State Bank of India have the lowest base rates at 9.70%.
IDBI Bank has a significantly larger exposure to the infrastructure segment since it was a development financial institution (DFI) before being converted into a bank in 2004. At end of FY15, IDBI Bank had an exposure of Rs 87,059 crore (power, roads, ports, aviation and telecom) to the infrastructure segment compared with Rs 25,992 crore for Syndicate Bank.
“Evidence of undercutting is usually anecdotal and happens more often with SME accounts. Banks, however, don’t compromise on asset quality and collaterals are strong,” said an analyst, who did not wish to be identified.
In a July 2014 interview with FE, SBI CMD Arundhati Bhattacharya said that given the ample liquidity in the market, banks were undercutting each other. “It’s not SBI alone. In the case of double-A accounts, we find everybody is quoting base rates as there is a lot of liquidity and credit growth is slow,” Bhattacharya had said.
Loan growth in the first couple of months in FY16 has shrunk with very little demand for credit. Companies have preferred to access the commercial paper (CP) market for their short-term needs and banks seem to have lent more via the CP route than through the loan market. “We have not received a single proposal asking us to fund a greenfield project for a year now,” Ranjan Dhawan, Bank of Baroda ED with additional charge of MD & CEO, had told FE in a recent interview.
1. Syndicate Bank proposes to lead a consortium that offers a lower rate of interest at 11.75%
2.Also offers a generous extension of the tenure that helped it clinch the lead bank status
3.Agrees to refinance project loans of R1,650 crore given to Reliance Infra subsidiary
4.R-Infra BSE filing, however, did not mention Syndicate replacing IDBI Bank as lead lender