Economy

Praised by Piyush Goyal, IREDA Continues High Pace of Lending Even as Bad Loans Rise

Although the state-run power sector lender doesn’t follow RBI guidelines on loan restructuring norms yet, the CAG has in the past pointed to gaps in its due diligence process.

Credit: PTI

Credit: PTI

New Delhi: Unconcerned by its rising bad loans, the Indian Energy Development Agency (IREDA) is aggressively lending to renewable power generators.

If it continues at this pace, experts say, it could suffer the same fate as Power Finance Corporation (PFC), which saw its non-performing assets (NPAs) jump by 300% to Rs 30,702 crore in 2016-17 after it adopted the Reserve Bank of India’s loan restructuring norms.

IREDA sanctioned loans of Rs 10,199 crore in 2016-17, 30.65% higher compared to the previous year. It also disbursed 54.78% more loans during the year.

At a press conference on October 8, the former power minister Piyush Goyal spoke in glowing terms about the large number of loans that the public sector firm had made to entrepreneurs in the windmill and solar power business.

The latest data, however, shows that the state-owned lender has been aggressive in lending at a time when its NPAs are rising steadily. IREDA’s gross NPA jumped by 65% between 2014-15 and 2016-17.

According to media reports, it plans on disbursing Rs 13,000 crore in the next fiscal year and aims to capture 20% of the renewable loan market share.

IREDA’s loan sanctions, disbursal in recent years (Rs crore)

Year Loan sanctions Loan Disbursal
2014-15 4,549 2,619
2015-16 7,806 4,257
2016-17 10,199 6,593

Source: Company’s financial statements

IREDA had to write off loans worth Rs 40.56 crore in 2014-15 and it could be forced to take similar measures to clean up its balance sheets in future as well given its rising NPA level.

On its end, PFC was able to hide its staggering loans because it was following the power ministry’s loan restructuring guidelines which are less stringent compared to those prescribed by the banking sector regulator. Being a 100% government-owned company, IREDA too is subjected to relatively relaxed regulatory supervision by the RBI.

During its performance audit of IREDA between 2008-09 and 2012-13, the national auditor found several deviations from RBI’s lending norms.

“Several weaknesses were noticed in the operational controls of IREDA such as non-conduct of periodic inspections of project, non-appointment of nominee directors on the board of directors of the borrowers and non-framing of functional manuals for strengthening internal controls,” the CAG observed.


Also read: Power Sector Lenders see NPAs Surge Even as Piyush Goyal Defends IREDA’s Loan Record


It added, “Out of 42 cases selected by audit, it was observed that in 17 cases (40%), IREDA had deviated from the norms prescribed in the financing guidelines for credit exposure limits, creation of mortgage, promoters’ contribution, conduct of inspections, etc.” Only company management can tell if internal regulations relating to loan disbursals have been tightened enough to prevent recurrence of similar breach.

IREDA’s  non-performing assets during 2014-17

Timeframe Gross NPA (Rs crore) Gross NPA as % of outstanding loans
At end of March 2015 475.84 5.34
At end of March 2016 591 5.71
At end of March 2017 784.08 5.76

Source: Company’s annual reports

The CAG has detected non-compliance by PFC and Rural Electrification Corporation (REC) with key RBI lending guidelines in its recent performance audit of these companies.

According to 2013 RBI guidelines, financing agencies should not depend on certificates issued by chartered accountants and strengthen their internal controls and credit risk management system to enhance the quality of their loan portfolio.

However, the CAG found that there was no policy in place at PFC and REC to ensure end utilisation of funds by the borrowers. It noted that there was a diversion of Rs 2,457.60 crore by the borrowers and promoters in the sample reviewed by the auditor.

Riding high on power sector growth, PFC saw a phenomenal increase in its loan book over the last decade. PFC’s total assets increased from Rs 51,568 crore at the end of 2007-08 to Rs 2.40 lakh crore by the end of 2016-17, registering 400% growth. The PSU lender sanctioned 55% more loans in 2016-17 compared to the preceding year. Its loan disbursal too grew by 35% over the previous year.

PFC had a similar rate of growth in loan sanctions and disbursal in the entire past decade. Naturally, it witnessed a period of high profits and nominal NPA.

But high growth led to complacency on the part of the lender in conducting due diligence on loan applications and supervision of fund utilisation by borrowers, which finally proved its undoing.

IREDA too is riding high on credit demand growth of the renewable energy sector. Since the clean energy sector is expected to remain top priority for the government in the foreseeable future as well, IREDA’s loan book will continue to rise. But the challenge for the company management would be to maintain compliance with robust loan appraisal guidelines.

During high credit growth phase, lenders tend to slump into complacency in implementation of internal controls as observed by the CAG in its performance audit report on PFC and REC.

“Audit noticed that REC and PFC did not conduct appropriate due diligence during credit appraisal and assumed higher risks on the loan accounts. Both REC and PFC deviated from their own internal guidelines and failed to conform with RBI guidelines applicable to NBFCs. The experience of the promoters to develop the project was not objectively assessed. The financial capacity of the promoter to bring in equity for the project in the face of competing demands was not ensured. Due diligence regarding viability of the project or conflict of interest, in the event the promoter also functions as principal contractors, was also not done. This led to loans being sanctioned to financially weak and technically inexperienced promoters who failed to implement the projects in time, resulting in time and cost overruns,” the national auditor said.

It appears that like PFC, IREDA too is in no mood to ignore the siren call of high growth. But if it will be able to avoid the fate of PFC remains to be seen.