“With a diverse asset portfolio, REC will be able to meet future business growth”

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REC holds a strategic position due to its role in financing the power sector and implementing the Government of India’s policies and flagship programmes. The company maintains a strong financial position and is well capitalised, with high asset quality, to meet future business growth. REC Chairman and Managing Director Vivek K. Dewangan recently spoke with J. P. Gupta on the sidelines of an event about the company’s robust portfolio and plans.

Excerpts:

How has REC’s performance been in FY23?

Our loan book has increased by 13%. In FY22, our total outstanding loan was around Rs 4.35 lakh crore, up from Rs 3.85 lakh crore. Similarly, our profit after tax (PAT) has increased by 10%. Our PAT in FY23 was Rs 11,055 crore. It was approximately 10,034 crore in FY22.

What is the outlook for FY24?

We are concentrating our efforts in the renewable energy (RE) sector because India has set an ambitious goal of achieving 500 gigawatts (GW) of capacity from renewable energy sources. The total installed renewable energy capacity is currently around 175 GW. To reach the 500 GW target, the country will need to add 325 GW of capacity, which will cost an additional Rs 15 lakh crore. REC plans to invest roughly 20% of this amount, or nearly Rs 3 lakh crore, in renewable energy. Furthermore, as we fund the upcoming green energy corridors, our loan book in the transmission sector may expand slightly.

What is the driving force behind REC’s new initiatives?

REC has a diverse asset portfolio with no single borrower accounting for more than 10% of the portfolio, and strong relationships and networks with stakeholders in the central and state governments allow REC to participate in new strategic initiatives.

What is your short- to medium-term outlook for the power sector?

The long-term plan for discoms’ infrastructure upgrades, which will cost more than Rs 3 trillion, aims to increase competition and efficiency in the distribution sector by allowing consumers to select their electricity supplier and monetizing transmission assets. Aatma Nirbhar Bharat intends to move towards renewable energy, hydrogen-based energy, and smart metering. Expansion of domestic manufacturing is critical for supporting renewable growth, reducing reliance on imports, and improving the storage-manufacturing ecosystem. The sector is expected to prioritise renewable energy investments, with the private sector taking the lead in this area, while the public sector will take the lead in conventional and nuclear energy.

What will be REC’s future focus areas?

Among the new business opportunities identified by REC are renewable energy projects, large hydroelectric projects, solar rooftop projects, solar parks, KUSUM projects, thermal power plant renovation, and pollution control equipment installation. The company is also considering investing in dedicated upstream infrastructure to ensure a consistent supply of coal. In order to capitalise on upcoming business opportunities and maximise returns for its stakeholders, REC is forming close professional partnerships with national and international financial institutions and multilateral development organisations such as KfW, JICA, the World Bank, IFC, the Asian Development Bank, and SDF. REC intends to raise capital in a competitive manner while adhering to international best practises, with a focus on power sector development in the country and beyond. REC also intends to diversify into new fields, such as funding, subsidiaries, and joint ventures, while closely monitoring market changes in order to maximise stakeholder value.

What is the REC’s current corporate exposure?

The state sector remains our primary area of operation in our outstanding loan composition. At least 90% of our loans are in the public sector, where we have never had a default. The private sector accounts for only 10% of the total. However, as we expand our use of renewables, the private sector’s share will grow.

REC will achieve net NPA zero status within the next two years. What about the overall resolution of stressed assets?

Stressed assets are being resolved through the NCLT process. NCLT resolution is transparent and equitable, but it takes time. Last year, four stressed assets were resolved, and we benefited. Actually, we had made a 70% provision, but in two projects, we received 100% reimbursement. As a result, we intend to complete 10 projects during the current fiscal year.

What is the cause of the net interest margin contraction?

Our net interest margin has shrunk slightly this year as the average cost of borrowing has risen because of the Russia-Ukraine conflict and other global events. However, we believe that interest rates will stabilise this year and that our net interest margin will improve. Borrowing costs are already beginning to fall, with rates falling below 7%. Our volumes are also increasing. I already mentioned the outstanding loan. Our disbursements in FY23 were also the highest until now, at Rs 96,846 crore compared to Rs 64,150 crore in FY22. I want to make it clear that REC is focusing a lot on improving its asset quality because margins also depend on the kind of projects that you take on. We are very conscious of the kinds of projects we take up and the entities that we deal with so that the asset quality becomes healthier. So, we might have to sacrifice the margins a little for better asset quality.

Is there any plan to cut funding for fossil-fuel power projects?

Not yet, in fact. Due to the gas crisis, India will require conventional generation for the next 20 years, with coal-based power sustaining due to the country’s advantages, as natural gas is unavailable and India’s strength lies in coal. We will have to rely on this naturally occurring resource until coal becomes available. Furthermore, India is one of the few countries that has fulfilled its NDCs. The conventional power generation industry currently accounts for 39 percent of our total outstanding loan portfolio, the highest in the industry. We intend to keep the distribution sector as the second largest, accounting for 37% of total revenue.

How much funding is the REC providing for the Revamped Distribution Sector Scheme?

The total outlay for RDSS by the Government of India (GoI) is Rs 3 lakh crore, of which the GoI grant is only Rs 97,000 crore. The remaining funds must come from state contributions or financing. So, approximately Rs 1.2 lakh crore will be raised through financing in the RDS scheme, which REC and PFC will fund. The scheme is actually implemented by the discoms. The GoI distributes funds to state departments via REC and PFC.

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