In fact, Dewangan says RBI’s proposed regulations on project financing is not going to affect their profitability at all. “Our book value will not be affected. The only impact is it may affect our capital adequacy ratio and tier I capital. However, we have a very good cushion already available. As against RBI norms of 15% of capital adequacy ratio, our capital adequacy ratio at the end of March 2024 was 25.82% and with regard to tier I capital, it was about 23.32% against the RBI norms of 10%. We have sufficient provision and we do not see any challenge to profitability of REC on account of draft RBI guidelines.”
The REC stock has done extraordinarily well. Everyone is happy with the way wealth has been created. Now what came out from the Reserve Bank of India, even though it is at a draft stage, created nervousness about which way REC’s profitability and provisioning would move. So, two scenarios here, if the draft is implemented, how will that change life for you? And if it is not implemented, would you indirectly start to increase provisioning?Vivek Kumar Dewangan: You have rightly pointed out that it is only draft guidelines and RBI has sought comments of the various stakeholders by 15th of June. This pertains to additional provisioning of 5% for the standard asset which is under construction phase and that has to be implemented in a phased manner over a period of three years from March 2025 to March 2027. By March 2025, the provisioning of 2% has to be done and by March 2026, this provisioning has to increase to 3.5% and by March 2027, the provisioning has to increase to 5%.
Again, if the under construction project gets into the operational phase, the provisioning is limited to 2.5% and if it has positive net operating cash flow, the provisioning would be about 1%. But here I would like to make a distinction between non-banking finance companies like REC which has been following the IndAS norm, as per RBI’s income recognition and asset classification norms this additional provisioning on account of under construction projects is not to be routed through profit and loss account. Therefore, our profitability is not going to be affected at all. Our book value will not be affected. The only impact is it may affect our capital adequacy ratio and tier I capital. However, we have a very good cushion already available. As against RBI norms of 15% of capital adequacy ratio, our capital adequacy ratio at the end of March 2024 was 25.82% and with regard to tier I capital, our tier I capital was about 23.32% against the RBI norms of 10%. We have sufficient provision and we do not see any challenge to profitability of REC on account of draft RBI guidelines.Can we take this on record that the draft guidelines from the central bank will not lower your book value or your capital adequacy?
Vivek Kumar Dewangan: Capital adequacy ratio may be affected, but we have sufficient cushion available there. So, we will be able to absorb that impact on capital adequacy ratio because our capital adequacy ratio is 25.82% against the RBI norms of 15%. So, we have a cushion of more than 10% already available with us.
Even if capital adequacy comes down, I am assuming all the possible scenarios here and the number which you mentioned, which means that there would be no immediate requirement for any fundraise in FY26 even if the draft guideline is implemented?
Vivek Kumar Dewangan: Yes, we do have options. In case, our capital gets reduced though the impact is not going to be much actually because we have a large cushion. We have the option of raising perpetual bonds. We can increase our tier I capital and tier II capital also can be increased by raising subordinate debt. So, those options will be available with us, but we do not see that we will have to resort to those measures.
What do you think is the rationale that the RBI may have behind introducing such guidelines and do you think they want to curb the growth or just scrutinise under construction projects?
Vivek Kumar Dewangan: In fact, we welcome the spirit behind draft guidelines issued by RBI. The spirit is that under construction projects need to be closely scrutinised. We need to monitor closely because in India, we have seen that there is likelihood of time and cost overrun. So this will put more scrutiny and closer monitoring to the under construction projects. This will help in execution of the under construction projects.
Are you on track to become a zero NPA company soon?
Vivek Kumar Dewangan: Yes, that is what we are told after our board meeting which was held on 30th April. We had made an ambitious plan. In fact, we have been able to bring down our net NPA at about 0.86% and around 10-12 assets are there which are yet to be resolved, but they are in the process of resolution. We have seven assets which are heading towards liquidation for which we already made 100% provisioning.In the remaining five operating assets, we see that a good resolution is likely to happen through NCLT and there will be writebacks of about Rs 1,500 -2,000 crore in the current financial year and we are targeting to become net zero NPA company by the end of FY25. And you will notice that not a single NPA has been added into our kitty in the last nine quarters and we would like to maintain this track record also.
For the next three to four years, what is your plan to achieve AUM growth of about 20% because your base is becoming bigger. So, 20% on this kind of base means you will double in three years.
Vivek Kumar Dewangan: Our asset under management (AUM) had grown by 13% in FY23 and in FY25 or FY24, our AUM has grown by 17%. So, we hope to sustain this growth momentum, which may vary from 15% to 20% as we are targeting to double our asset under management by the year 2030. Even if we maintain this growth trajectory of 15-60%, we will be able to double our asset under management by the year 2030.
One, you can raise money via the ECB route and second, you can raise money via the green bond route where you get an advantage. Do you see mix of these two instruments increasing and which will keep your cost lower and spreads higher?
Vivek Kumar Dewangan: Yes, we are making conscious efforts to reduce our cost of fund. In fact, last financial year our cost of fund has been reduced by 15 basis points from 7.28% to 7.13% and with a good mix of foreign currency borrowing and external commercial borrowing and we are using innovative hedging techniques and our cost of borrowing we are targeting to bring it down to about 7% in the current financial year and we will be able to hold on to our spread of more than 2.8% to about 2.9% and our net interest margin is going to be more than 3.55% to around 3.6%.
Current book you would say is coming from the traditional businesses, largely thermal led and how much is coming from the new renewable business, something which you have been maintaining from two-three years now that you want to grow that part of the business?
Vivek Kumar Dewangan: Our company has made a focused strategy to increase our renewable energy portfolio, which is about Rs 35,000 crore. As of now, we decide that the renewable energy portfolio will see a tenfold increase. Our renewable energy portfolio will increase to about three lakh crore by the end of 2030. It will constitute about 30% of our assets under management.
Is the cost of financing renewables the same as that of thermal energy?
Vivek Kumar Dewangan: We have been able to raise green bonds. Last year, we raised $750 million green bonds, then we raised global yen bonds and there is a margin of about 12 to 15 basis point while we raise green bonds and by innovative hedging techniques we are targeting to bring down the cost of our external commercial borrowing which will help in financing our green projects.
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You have a 15-18% growth trajectory over the next three to four years. Give us a little bit more clarity as to which are the segments that are going to be driving this growth?
Vivek Kumar Dewangan: One is of course renewable energy segment, where we have been financing an entire spectrum varying from large hydro projects to pumped storage projects, then solar module manufacturing projects, wind projects, solar projects, hybrid wind and solar projects, then electric mobility segment also we are targeting. We will cover the entire gamut of the renewable energy projects which are coming in the country because the country has made an ambitious plan to install about 500 gigawatt capacity of non-fossil fuel based electricity capacity by the year 2030.
At present, we are around 191 gigawatt capacity. It means that about 309 gigawatt capacity is to be added in the next six years. Another aspect to be noticed is that since renewable energy is intermittent in nature, we need to have a storage solution. Until and unless, commercially viable storage solutions are developed, the coal-based capacity will provide the grid stability and it will provide the base load, that is why the technical arm of the Ministry of Power, that is Central Electricity Authority, has made a projection that the country will require another 94 gigawatt capacity of coal-based thermal power plants by the year 2032. So, in next eight years this additional coal-based capacity which will come in brownfield projects will be coming, that will give us another business opportunity.
