NBFCs may get easier access to funds

K.R. Srivats

New Delhi, Dec. 5

Non-banking financial companies (NBFCs) may get some policy support from the Government and the Reserve Bank of India as part of the economic stimulus package slated to be unveiled on Saturday.

Allowing such companies to access external commercial borrowings (ECBs) window was among the several measures that figured in the discussions of the Prime Minister’s apex panel that finalised the stimulus package, highly placed sources in the Government told Business Line.

It has been recognised by policy makers that NBFCs, unlike banks, do not have access to low-cost deposits and are all “choked” on account of the growth seen in recent years. Also banks’ ability to lend to these entities is restricted as there are limits to banks’ exposure to NBFCs.

With the Indian economy witnessing a slowdown, banks are curtailing the flow of funds to the NBFCs, leading to difficulties in accessing funds. “With the RBI also clamping on the flow of funds to NBFCs, many of them look stressed and over exposed. Either banks may now be nudged to lend more to NBFCs by opening more lines of credit or they may be allowed to borrow through ECBs”, sources said.

While it was not clear as to what the scope of measures would be, indications are that the exposure limits of banks to such entities may also get tweaked to enable flow of more funds to NBFCs. The absence of an active corporate debt market and the steps needed on this front were also under consideration of the policy makers so as to address the funding requirements of NBFCs.

In India, there are two broad categories of NBFCs, NBFCs-D (deposit taking) and NBFCs-ND (non-deposit taking). There has been a significant decline in the deposit base of NBFCs-D.

An advisory group appointed by the committee on financial sector assessment had concluded that both categories showed an increased dependence on borrowings as a funding source. It was being felt that their growth should not be stifled through excessive regulations even while ensuring that these entities do not pose any risk to the system.

Besides the issue of access of low-cost funds, the NBFCs-D also bear high regulatory costs, and in the medium term, it may be difficult for these entities to compete with banks, according to the advisory group.

Meanwhile, in the interest of better market discipline and in the context of increasing complexities of holding structures and multi-layering, the advisory group is set to recommend that the RBI could consider increased disclosure by NBFCs such as ownership structure, significant holdings and nature and type of activities and products.

The central bank should also explore the option of examining the suitability of the major shareholders and senior management of NBFCs, according to the advisory group

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Pact signed for supply of Russian copters worth Rs 2,400 cr

Our Bureau

New Delhi, Dec. 5 India is to receive 80 MI-17V-5 helicopters from the Russian Federation. An agreement for the supply of the helicopters, which industry expects to be a contract of around Rs 2,400 crore, was signed during the on-going visit of the Russian President, Mr Dmitry A. Medvedev.

The MI-17 helicopter is a multi-utility machine that can perform a variety of functions from transporting VVIPs to being converted into a mobile hospital and can fly in various weather conditions, the company website states.

The two countries also agreed to cooperate in the construction of Russian designed nuclear power plants at new sites within the country apart from assisting in the construction of additional nuclear power units at Koodankulam in Tamil Nadu. The Russians are already constructing two 1000 MWe units at the Koodankulam site and talks have been on for at least four additional units at the same site.

The visit could also lead to an Indian citizen taking a spaceflight as the Indian Space Reach Organisation (ISRO) and the Russian Federal Space Agency signed a memorandum of understanding on joint activities in this field.

A memorandum of understanding between the co-chairs of the chief executives councils was signed by the Council Co-Chair, Mr Vladimir Yevtushenkov, and the Chairman and Managing Director, Reliance Industries, Mr Mukesh Ambani. Besides, an agreement was also signed for a joint action programme for cooperation between India and Russia in the tourism for the period 2009-10.

These decisions formed part of 10 agreements that India and Russia signed during the visit. Addressing the meeting, the Prime Minister, Dr Manmohan Singh, said that India has directed its officials to “expedite all measures” required to achieve the bilateral trade target of $ 10 billion by 2010.

The two sides also discussed the possibilities of greater cooperation in both up and downstream projects in the hydrocarbon sector. “Our dialogue in this area has intensified considerably,” Dr Singh added. Besides, issues connected with science and technology, culture and terrorism were also discussed at the talks between the Russian President and the Prime Minister.

The Prime Minister said that all steps including the activation of existing and new mechanisms such as Inter Governmental Commission, the Joint Task Force, the India-Russia Trade and Investment Forum and CEOs Council will be taken to achieve the $ 10-billion target.

Later speaking to the media, the Russian President said that a “substantial time” was spent in discussing military and technical issues. “We spoke on military and technical issues in great detail. We have identified ways to resolve outstanding issues” Mr Medvedev said.

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Govt cuts petrol price by Rs 5, diesel by Rs 2

Our Bureau

New Delhi, Dec. 5

Call it a Christmas gift or ushering in a feel-good factor, the Government on Friday announced a cut in auto fuel prices.

Passing on the benefit of steep fall in international crude prices to the consumers, retail selling price of petrol has been cut by Rs 5 a litre and diesel by Rs 2 a litre.

The prices of cooking fuels were, however, left untouched.

Speaking to newspersons after a meeting of the Cabinet Committee on Political Affairs (CCPA), the Petroleum Minister, Mr Murli Deora, said, “to protect the interests of the common man and to pass on the benefit of the fall in international oil prices, the Government has decided, as an interim measure, to reduce the price of petrol by Rs 5 a litre and diesel by Rs 2 a litre with effect from December 6.”

He further said that the Government is closely watching the international oil prices and their impact on the country’s economy, and will take appropriate decisions whenever necessary.

Pressure had been mounting on the Government to cut fuel prices. Since August, crude oil prices had started declining. On December 4, the Indian basket stood at $ 41.53 a barrel, after hitting a high of $ 142.04 a barrel in July.

According to the industry, there were two options before the Government. It could either free petrol and diesel from the administered price mechanism, thus allowing the PSU oil marketing companies (OMCs) to revise the prices in tandem with market conditions or consider a price cut.

When crude was scaling over $ 120 a barrel, the Government had in June increased prices of petrol by Rs 5 a litre, diesel by Rs 3 a litre and LPG by Rs 50 a cylinder. Even then the Government had taken the average crude price of around $ 67 a barrel. The increase had resulted in petrol costing Rs 50.56 a litre in Delhi from Rs 45.56 a litre. In effect, the current cut has neutralised the June petrol hike.

Friday’s price cut would result in a collective saving of about Rs 6,000 crore for auto fuel consumers, while the OMCs will incur an additional burden of Rs 5,300 crore. The OMCs – Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd – at current international prices and with the revised retail prices are projected to incur under recoveries of about Rs 1,10,000 crore for the current fiscal. “A formula would be worked out to deal with the issue of under recovery,” the Minister said.

The OMCs incur revenue loss on petroleum products, as they sell them at controlled price. They started earning positive margins from November on petrol and diesel. The companies were making Rs 14.89 a litre profit on petrol and Rs 3.03 a litre on diesel. However, they continue to lose Rs 16.60 a litre on kerosene and Rs 142.67 on an LPG cylinder.

Apart from incurring losses due to selling products below the market price, there have been additional factors adversely affecting the financial health of OMCs. The factors include high interest burden due to heavy borrowings at high interest rates, foreign exchange losses due to rupee depreciation, inventory losses, and drop in gross refining margins.

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‘I’ve never seen such a positive environment for renewable energy’

N. Ramakrishnan

Recently in Denmark

It has been a long day for Mr Ditlev Engel, President & CEO of leading wind turbine maker Vestas. He has been accompanying financial analysts to Vestas facilities in Aarhus and Hammel, Denmark, with other senior company officials.

In the evening, Mr Engel, 44, sits down with some Indian journalists, on a visit to Denmark sponsored by Vestas, for a chat on the global economic situation and its impact on the wind energy sector. Mr Engel, who has been President & CEO of Vestas Wind Systems A/S since May 2005, holds a Diploma in Business Economics from the Copenhagen Business School and has participated in a general management programme at INSEAD, France. Excerpts:

What has been the impact of the global economic situation on the wind energy sector?

I would prefer to talk about the impact on Vestas rather than that on the sector, because these might be two different things. In 2007, we did about 5,000 MW at Vestas. We decided to go to 10,000 MW by 2010. Our investment and development have been focussed on getting up to this level of execution capability.

The world changed fast. When we announced our second quarter results in August, the only question analysts asked was whether we could get to 10,000 MW by 2010. I said yes, we can. We have over the last 12 months employed 5,000 people. Even though next year we expect to grow by 25 per cent, we have actually made it clear that we have a cost base now that is 15 per cent too high for a 25 per cent growth.

We have demonstrated that we were on the right track with the kind of ramp-up and investment that we are doing. Our investment next year stands at €1.2 billion. Our confidence in the growth scenario is robust. The energy challenges have become even more daunting and pressing now. We live in a world where people are managing issues from day to day, but energy is about long-term view.

Let me put the financial issue out of the equation and look at the political agenda. I travelled in China two weeks ago with the Danish Prime Minister where he met with both the President and Premier. Denmark is hosting the climate change conference next year. He got the best support ever on a (climate) deal. The EU has also said that financial challenges are not an excuse for not addressing the climate issue.

In the US, the President-elect, Mr Barack Obama, wants to create 5 million new jobs and he has said that energy independence and climate issues are going to be on the top of his agenda. All energy is politically driven and politically regulated. I have been the CEO of Vestas for the last three-and-a- half years and I have never seen such a positive political environment.

On the day we announced our Q2 results, the price of oil was around $140 a barrel and analysts asked me why we can’t double the price of our turbines. Now, when the price of oil is $50 a barrel, the analysts are asking me why we can’t lower the price of our turbines. I said the energy companies have a 20-year view and not the flavour of the day. It is clear that fossil fuels prices will go up. There are customers who are facing difficulties, but, overall, the energy agenda is one of the reasons why we believe that the outlook is robust.

We employed 5,000 people over the last 12 months. There have been no lay-offs, but we have stopped employing people for the moment. We haven’t stopped investing. We believe that these things will start moving again, may be not at the same speed. We are certain that the US agenda for going Green is going to be big and we are certain we will kick ourselves if we had stopped ourselves in the US. We are going to use 2009 to build in the US more than manufacture in the US.

What about access to capital?

We believe that we can make the projects more bankable for our customers. If you take the customers or the banks’ customers through a presentation, when the banks start to release cash again, we believe that it is some of the lowest risk you can actually release. Germany is a market driven by small-medium-sized developers. You have got the German state buying electricity, the same guys who bail out the banks. You got a very high business case certainty.

There would be other projects with a higher risk profile, which would be more likely to be hurt than these kinds of projects. We spend a lot of time reviewing our customer portfolio and the bankability. There are many projects when times were good, when people have had some very exciting projects and we have just said no, we are not going to do it. The marginal projects will have more difficulties, whereas those who have a safe business will go on.

Have you had any order cancellations? Do you see a slowdown in order bookings?

No, none at all. We have seen that those customers who have lost a bank, for instance, when Lehman went in the US, calling up and saying they can’t go on, because their bank has disappeared. Lehman was a big trader for tax credits on the PTC in the US, so the appetite for tax credits has gone down. In some of these areas, we have seen an impact.

We have learned from the financial crisis that big is not equivalent to good. Those, who do not have good projects or whose financing situation is more complicated, will have a bigger challenge.

Those having good cash flows, good management and strong operations would go on even if they are not the largest companies.

The wind energy industry has always said that with oil at above $59 a barrel, wind energy is more competitive. Now, with crude prices falling below that mark, how do the economics work out?

In July, crude was at $140 and people said it will go to $200 by Christmas. The same people are now saying it is going to be at this level for the next 9-12 months. Apart from the price of oil, it is true that higher the fossil fuel prices, the easier it is to understand the attractiveness of our energy.

From the utilities point of view, this is also about balancing their risk. Wind is the only type of energy where you can hedge your risk 100 per cent for the next 20 years. From a risk management point of view, you want to make sure that you have a diversified portfolio.

I think we have not had a price on carbon in the US. I think the new administration is going to put a price on carbon.

Another issue that people haven’t spent so much time on, but I know that some of our customers are factoring in into their business price model is that they don’t believe the price of water for exploration and so many other things will remain at this cost. China has invested $10 billion in pumping water from the South to the North because of drought. Drought is a huge issue in Australia and in certain states in the US. That water will come at a cost. Water is an important part of energy exploration. When you start to factor these things in, which many of the major utilities are doing, you start getting many different mechanisms in your pricing model for wind versus other types of energy. You need to balance the vi

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Business leaders warn of Christmas sales meltdown

Business leaders warned of a Christmas sales meltdown today after a bigger than expected fall in high street sales in the first half of November.

A 46 per cent balance of retailers said sales were below a year ago, while 40 per cent predicted worse to come next month, the CBI business group's distributive trades survey found.

The gloom caps a week which has seen Woolworths and MFI crash into administration and disappointing updates from other big names such as Currys' owner DSG International.

Andy Clarke, chairman of the CBI's distributive trades panel, said: "Christmas is going to be extremely tough this year, with retailers having to work harder than ever to keep the tills ringing."

The CBI's survey was carried out between October 28 and November 12 - although the Bank of England slashed interest rates by 1.5 per cent to 3 per cent on 6 November.

Chancellor Alistair Darling also attempted to kick-start high street spending with a temporary VAT cut worth £12.5 billion this week.

Mr Clarke said the added pressure of changing millions of prices to reflect the cut would be an "unwelcome and costly burden" on the sector.

"Lower petrol prices and recent cuts in interest rates should help put a little more into people's pockets, as will the VAT cut, but only if retailers pass it on before Christmas," he added.

The CBI said those retailers linked to a plunging housing market continued to suffer but there was also a sharp decline in sales volumes among grocers - ending two years of continuous growth.

The bleak retailing environment has prompted a 57% balance of firms to cut investment plans - the worst result in the survey's 25-year history.

IHS Global Insight economist Howard Archer said the figures "added to the litany of bad news" from the high street and forecast the Bank of England could slash interest rates again by as much as 1% at its meeting next week.

"We suspect that there will be a lot more discounting, special promotions and flash sales right up to Christmas to try and get hard-pressed consumers to spend.

"It is also likely that there will be some extremely attractive bargains in the New Year sales," he said.

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