NHAI should speed up to meet daily 20 km target: Fitch

The ratings agency has said that the pace at which projects are being awarded as well as the actual execution should be stepped up even further

Fitch Ratings today said that the National Highways Authority of India (NHAI) will have to step up the pace of awarding and executing projects if it has to meet the target of laying 20 km of roads daily, reports PTI.

While the ratings agency noted that there has been improvement in these areas of late, it called for a further speeding up of the process.

Referring to the government’s acceptance of the BK Chaturvedi Committee recommendations on NHDP (National Highways Development Programme), it said that the move has increased the pace of awarding projects from December 2009.

“These are encouraging signs; however, to achieve the daily target to construct 20 km of roads, the pace at which projects are being awarded as well as the actual execution has to step up even further,” Fitch said.

It also cautioned NHAI against private sector counterparty claims and said that they could lead to additional burden on resources requiring rework on finances.

“Additional burden on the entity's resources may stem from private sector counterparty claims that are currently locked up in various dispute redressal processes,” Fitch said. “These claims may necessitate a rework of NHAI’s financing plans.”

Fitch also expressed concern over limited participation of private players in the highways development programme.

“Limitations on the private sector's capacity to participate in the highway development programme could impose added financial strain on NHAI.”

Fitch, however, maintained its ‘AAA’ ratings—the best risk within a country—of NHAI as well as its Rs 8,000-crore long-term debt programme.

“Fitch Ratings has today affirmed the national long-term rating of NHAI at 'AAA(ind)' and its Rs80-billion long-term debt programme at 'AAA(ind)',” the agency said in a statement.

It noted that against a planned issue size of Rs4,000 crore in the financial year 2009-10, the authority has received subscription of Rs902 crore as of 20 March 2010.

It said that during 2010-11, NHAI plans to issue bonds worth Rs4,000 crore.
Fitch said that its ratings factor in substantial support NHAI has received in the form of fuel cess and grants from the government.

Fuel cess is a major component of NHAI's finances and in FY'10, it constituted 84.7% of NHAI's total finances at Rs7,400 crore, representing an increase from 43.3% in FY’06, it said.

The ratings agency also pointed out that NHAI will need stable policies and continuity of senior management to be able to meet its ambitious targets. It said, “Frequent policy changes and lack of continuity of senior management in the past have caused NHAI to under-achieve its physical targets, and in Fitch's view stability on both of these factors would be necessary in order to bring NHAI's ambitious plans and targets to fruition.”

NHAI is an autonomous body, set up to develop, maintain and manage national highways.


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“We didn’t want to be just another finance provider”

With its unique business model and customer focus, Shriram Transport Finance Company (STFC) has grown rapidly in the commercial vehicle (CV) financing space since it started operations over 30 years ago. The company’s managing director R Sridhar speaks with Moneylife’s Sanket Dhanorkar about how and why STFC chose to focus on this segment and what it has learnt over these years. This is the first part of a two-part interview series.

Sanket Dhanorkar (ML): Your company has a unique business focus—vehicle financing of small truck operators (STOs), a section which remains largely untouched by banks and other players. What was the rationale behind this focus and how will it drive revenues, going forward?
R Sridhar (RS):
Shriram Group has always been looking at businesses where there has been a credit starvation. We didn’t want to be just another finance provider. We wanted to be the only finance provider in this area. This segment has not been selected for profit only. So within the CV segment our focus is the small trucker, who has trouble accessing credit. He has always been in the grip of the unorganised sector. Even if he gets credit from this sector, it is at a usurious cost. So we felt that we have a role to play. If we can cater to his requirement, it’s actually very critical to the economy of the country. The role played by the small trucker is movement of cargo and goods of customers, which is very critical to economic growth. So by making his cost cheaper and providing organised credit to him, we are actually reducing the cost to the economy. So we have chosen this business on that rationale. The business should be unique, (occupy a) niche and it should make sense to the economy.

But the journey hasn’t always been easy. We have always encountered a lot of problems because this customer has been perceived to be risky. The problem is this customer is considered un-bankable. Banks expect one customer to be a multiple source of business. But a trucker is not in a position to even get acquisition credit, forget about other products. Unfortunately because the unorganised sector was catering to this customer, the interest rates were higher.
So once the interest rates you pay are high, you are automatically perceived to be risky. So people had abandoned him. That is where Shriram Transport arrived. It was not without its difficulties. It took around 25 years for us to prove to the world at large that this is also good credit. Once you have changed the mindset, then you can really enjoy it.

ML: What difficulties are you exactly referring to?
Since banks were not willing to fund this customer, they were also unwilling to fund the one who was funding this customer. This mindset changed only after 25 years of operations. Now, it is the other side—they are ready to give more and more credit. {break}

ML: Are you are going to continue focusing on this segment?
We are only financing small truck owners. We are financing whatever he wants. We don’t like being labelled as a second-hand truck financing company. Sure, we do 70% of it, but we don’t stop there. When he (the trucker) wishes to upgrade, we assist (him). We don’t abandon him when the loan is repaid. We now also provide him working capital. Majority of it is operational, but we also finance a bit of personal expenses. So we are partners to the trucker. He is a working partner; we are a financial partner. A financial partner can be paid off over a period of time. So from one entrepreneur we go to another. In this way, we support lakhs of entrepreneurs. We pull these people from the unorganised sector, keep them with us, and some of them over a period of time get upgraded to bankable status. Some of them buy multiple trucks; some people buy an old truck to start with, then upgrade to a new truck. So our job is to facilitate this transformation of the customer. Some customers move on to banks; others stop at us. So we provide the cheapest credit to this segment. So the credit-worthiness of the customer is improved and proven, once he becomes our customer. In the process, we lower his cost of operations. That’s the role we are playing and will continue to play. We will further strengthen it. We are innovating, tracking whatever the customer accesses outside our doors and try and provide that to him also.

ML: You emerged largely unscathed from the downturn by focussing on asset quality and curtailing disbursements. What have you learnt from this period and how has it changed your operational strategies?
What happened in 2008 was unprecedented. The whole world was affected. Big companies and banks suffered. Liquidity was greatly affected. Fortunately, the Indian government as well as our central bank did a commendable job. They brought back the liquidity in good time. The learning which I had was, ‘what can happen will happen’. You need to be improving the risk-management practices all the time. In the finance business, if you have no money and are unable to honour your commitment, then your credibility is lost, which cannot be repaired.

Fortunately for us, we had enough liquidity at the time of the crisis. We anticipated that kind of liquidity crisis. Even today, we keep excess liquidity in the system to meet any such eventuality.

Similarly, apart from the liquidity risk, we are facing interest risk. On the liability side, we have both fixed and floating rate funds. But on the asset side, it’s a completely fixed rate. In the last one-and-half to two years, we have accessed more fixed-rate funds. So now we are almost out of interest rate risk. We have matched the assets and liabilities to such an extent that even if interest rates go up tomorrow or come down, it doesn’t matter.

The hallmark of our success has always been our dealing with delinquency risk. Delinquency risk deals with the credit quality, which has always been good in our case. But the credit for that should also go the customer who took the loan and repaid it. If you have done proper valuation and have sufficient equity of the customer, then the loan cannot go bad. In the first 12 months if somebody has paid, his equity goes up and loan comes down. Here we are almost 50-50, after which there is no possibility of any loan delinquency. Over a period of 30 years, we have learnt how to value the vehicle, how much to lend and so on. The maturity of this business in handling this risk has gone up substantially, which has us given huge strength. We came out unscathed from the crisis, primarily because of our credit quality. It is our obsession and we will continue to focus on it.

(The second part of this interview will be carried tomorrow).


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