H D Khunteta, CMD, REC

What is your vision for REC? What development model do you have in mind?

Our objective is to make REC a comprehensive financial hub, to cover the entire segment of finance, including promotion of bank. If possible, we would also like to join hands with a top rated foreign insurance company to foray into the insurance sector.

We have also formed a policy for equity investment/PE fund. The work has been given to the Expert Committee who will take assistance from financial consultants, to prepare a final report which will then be put up to our Board for approval. The objective is only value enhancement for the stakeholders.

We feel that at present our spread is the best in the industry at 330 basis points, net interest margins at around 450 basis points. Return on total assets is also high at more than 3 per cent which is comparable with the best domestic and international financial institutions. To sustain growth rate of 20 per cent on  higher base, we may require to tap into other sources , incroreease fee based income and enhance the business activities of subsidiary companies. REC PDCL is poised to enter consultancy of load management, energy audit, renewable energy and distribution business. We are on course to achieve that and as of March 31, 2011 our loan assets have incroreeased to Rs. 81,725 croreores and our net profit to the level of Rs 2569.92 Crore.

How long have you been with REC?

I joined REC on 5th May 2004 as Director Finance and it has been seven years since.

REC is today one of the leading financial institutions in the power infrastructure financing in the country. Please tell us more about this interesting journey and how the transformation was made possible ?

During the last seven years REC has actually witnessed a major growth phase which has transformed the organisation more than ever before, since its inception 41 years ago. A host of initiatives were taken on several fronts to ensure  a well managed growth into the future for REC.  You can judge this from the fact that at the end of fiscal 2004 REC had total loan outstanding at about 18300 Crore and today we add almost that amount in one year ! As a result of the aggressive business strategies adopted during this period, at the end of fiscal 2011 our loan outstanding stood at about 81725 Crore, which means that over 77 per cent of the REC assets have been added during the last seven years or so.  Key parameters of Total Income and Profit After Tax have grown significantly by registering  impressive seven year CAGR since fiscal 2004 at 22.5 per cent and 22.7 per cent respectively by the end of fiscal 2011.

The performance on the asset side has been equally matched by raising and managing resources and liabilities efficiently.  In fiscal 2004 REC borrowings stood at about Rs 15098 Crore whereas by end of fiscal 2011 we had borrowings of Rs. 70004 Crore (other than reserves) on our books. During the period REC approached the capital markets with its maiden IPO and a further public offering a couple of years later, which was at a time quite adverse for financial markets.   Our EPS during this period has grown from 7.80 in fiscal 2004 to 26.03 in fiscal 2011, thus consistently adding to shareholder value. Financing of Generation projects as a newly identified thrust area during these years, reaped rich dividends.  We undertook unprecedented hiring at all levels including laterally, which has helped us drive this growth. Operational systems and practices have been beefed up through use of appropriate use of technology and proper controls checks and balances have been put in place. We have opened a couple of subsidiaries with an eye on the future wherein we expect decent and profitable business. We achieved the ‘Navratna’ status and a number of awards and accolades. I truly believe, the journey for REC has just begun.

How about REC transmission company, which is the other subsidiary of REC?

REC Transmission Company has the mandate from the Govt. to act as ‘Bid Process Coordinator’ and three transmission lines have already been allotted to the private sector through the competitive bidding process. This year three more lines are to be allotted to the companies with the most competitive bids for which we charge 15 Crore Rs each. So current year we are expecting to have an income of 45 Crore from these projects, which will be incorporated in our consolidated balance sheets.

Please elaborate on the role to be played by REC in the renewable energy sector.

The Government Of India has started to concentrate on the renewable energy only in the last one year or so. Now it has become mandatory for distribution companies to purchase three percent of the total power purchased through renewable energy resources. This will provide a big boost to the renewable energy sector. There is a lot of interest in solar power projects and also in the wind energy sector. The target is to generate 2000 Mega Watt of power from solar in the next three years. In the case of wind energy there is a target to croreeate more than 20,000 Mega Watt capacity in the next four to five years.

That in the next 15 years despite all theories to the contrary, Coal will remain the mainstay of power generation but a gradual shift to sources like solar, wind and hydro is imminent. However as a financial institution the economic viability of such projects remains a concern, so in a number of cases we are asking for collateral security in addition to charge on assets / escroreow mechanism, while sanctioning the loan. The Asian Development Bank has come out with a provision for providing collateral security upto 150 million dollars for such projects in the Renewable Energy sector and that in my opinion is a very welcome move.

What is your personal analysis of the financial viability of the solar power?

Actually the financial viability of solar power projects is still unproven as it depends largely on the solar factor which is assumed at 20 per cent – 22 per cent. Whether that estimates can be counted upon, is yet to be established. So if the project is to run at a lower solar factor due to any inconsistencies in the weather pattern, the financial institutions should not be the ones trying to absorb the impact, instead the distribution companies or the government has to commit to cover the short fall in case of lower production, as was done in the case of hydro power at one time or developer should provide collateral security.

Is REC planning to enter the commercial banking sector?

REC doesn’t want to convert itself into a bank. We are more interested in being the promoters of the bank. We are interested in joining hands with the Power Finance Corporation or other such NBFC’s or foreign banks towards this end. But so far the RBI has not issued guidelines to this effect and we will refrain from commenting at this time. Even after a “go ahead” from the RBI, we will need approval from our Board and many other agencies, so any statement would be premature.

We do see a very bright future in the banking sector and feel that promotion of a bank would definitely enhance value for the stake holder.