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Finance | September 2011

Our cost of borrowing is the lowest

This is as compared to non-banking financial corporations, HD Khunteta, CMD, Rural Electrification Corporation, informs Shashidhar Nanjundaiah.

The Rural Electrification Corporation (REC) was incorporated to finance rural electrification plans. The company's CMD spoke about their USP and financing for T&D. Excerpts of the interview:

An advantage of REC is that you're the quickest in the market. So how do you manage that?
Our cost of borrowing is the lowest compared to all the non-banking financial corporations. At present the cost of borrowing is around 7.85 per cent on the total borrowing of around Rs 74,000 crore. In fact, the interest rates on the total borrowing as on 31st March 2010 was also at around 7.85 per cent. In general, the rate of interest in one year (2010-11) has increased by 125 to 150 basic points. But we've been able to maintain that same cost of borrowing in spite generating interest rate. We have gone with mixed borrowings. We have raised money through discount bonds and around $1.20 billion has been raised through external commercial borrowings. Out of $1.20 billion, $500 million has been raised through bond issue, which has been listed in the Singapore stock exchange and the balance was raised through syndicated loans. Even the syndicated loans that we raised are in the range of 175 to 170 basic points. If we compare with Power Finance Corporation (PFC), they raised at the same time at 195 and 250 basic points. So our cost of borrowing is cheaper as compared to PFC or international borrowing. We had also done swap. We raised that money at around 8.75 per cent then swap was done linked to the one year Central government security with a certain margin and through that the cost of borrowing has been reduced to 7.40 from 8.75 per cent. But this needs to be reset in 1, 3 or 5 years. We bought the five year reset at about 8 per cent against the prevailing bond price for five year bonds at around 8.50 per cent. So our swap time-frame has resulted in profits and in one year we will save around Rs 40 crore through this transaction.

The company is still involved with Rajiv Gandhi Grameen Vidyut Yojana (RGGVY). Is there any special emphasis for RGGVY in financing?
In RGGVY, the total scheme is for around Rs 33,000 crore and out of [our target of] 116,000 un-electrified villages, around 98,000 have been electrified. The rest will be electrified by the end of 2011 and we will be able to achieve the target this fiscal.

The health of discoms in states is a cause for concern. Do you finance to states for distribution?
Out of the total loan book of around Rs 82,000 crore, 84 per cent is outstanding from state discoms. Of the outstanding loan book, 84 per cent is to the states, which includes generation, transmission and distribution companies. So far we've been able to get the money through discoms. We have got the money, which was a major concern, from Tamil Nadu. The amount due was around Rs 400 crore and it has been received on the due date. Our payment security mechanism is very strong and it is covered through charged own assets/guarantees from the government and escrow mechanism where the agreement is signed between the bank utility and REC and before acceptance of the mechanism, we see their last few year collections whether it is sufficient to serve our interests and loan requirements. There have been no defaults till date. Rajasthan, Tamil Nadu, Uttar Pradesh and in the case of Rajasthan where the outstanding dues are around Rs 8,800 crore, are covered through 100 per cent government guarantees. The guarantees are issued after getting approval from RBI. In case of default, they have to make the provision in the budget itself and this is in addition to the escrow mechanism where the revenue is to be deposited in the bank and through that we get our money.

Does the company also lend to transmission?
We provide funds to transmission as well. Our main activities are transmission and distribution (T&D) out of the total loan book of Rs 82,000 crore and 51 per cent is on account of T&D and 45 per cent is on account of generation. It is equally distributed. It is not like power finance where around 70 per cent is for generation. For the power sector, both have equal importance because whatever power is generated cannot be transmitted without the transmission line and ultimately they have to provide power to the end-user and they are the people who are collecting money directly from the end-user.

Does REC mandate to discoms or transcos what technology they should use to increase efficiency so that your funds are used in the most efficient way?
They are using the equipment on transmission towers or cables from standard companies. For towers, the manufacturers are Jyoti Structures, KEC International, etc. They are renowned companies and we have seen no fault in their transmission lines. Distribution is more important where they have to take transformers from different companies. The demand for power has increased and sometimes when demand increases, the transformer does not have the capacity so there is a need to change that also due to growing demand. States can reduce losses if they go for high voltage, separate lines for agriculture, go for a change in transformers where demand is higher and go for smart metering, smart grids etc. So the ultimate objective is to reduce load-shedding to the level of 15 per cent. If they are able to achieve that then the government has come up with APDRP-2 where the scheme is about Rs 52,000 crore and if the states are able to reduce the losses to the level of 15 per cent continuously for five years then 10 per cent of the loan will be converted to grants. So 50 per cent of their loan, which is around Rs 26,000 crore, will be given as a grant to motivate the state to reduce losses.

Does REC provide or is it planning to provide advisory especially to states?
We have another subsidy company that is REC for distribution. We have already bid for the billing for Meerut city and we are the lowest so we should get it and we are also providing service for load management, energy audit through this company and our objective is to provide services to utilities in order to reduce the losses. There are also more offers to get the business and mitigate the risk.

About REC

Rural Electrification Corporation Limited (REC) was incorporated on 25 July 1969 under the Companies Act 1956. REC is a listed Government of India public sector enterprise. Its main objective is to finance and promote rural electrification projects all over the country. It provides financial assistance to state electricity boards, state government departments and rural electric cooperatives for rural electrification projects as are sponsored by them.
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