Powering India forward – SBI Capital

PFI 500
11 min read

SBI Capital is India’s largest investment bank and it provides the entire bouquet of investment banking and corporate advisory services, including leading the country’s project finance market. By Minerva Lau.

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“Nothing can stop India from becoming the next third-largest economy in the world,” India’s finance minister P Chidambaram told parliament during the debate for the budget of 2013–14. “We will be there along with the US and China. We have everything to get there but we won’t be there till we work hard and respect the laws of economics,” he said.

India has grown into a strong and formidable economy. In the 1990s, the world’s largest democracy and second most populous country emerged as a major power, with a strong military and a fast growing economy. It experienced average growth of 8.17% in the past nine years (FY2004–2012). However, for FY 2013, the growth rate is forecast to be 5.5% and the government aims to bring back the annual growth rate of more than 8%.

Behind the high-growth rate is its domestic financial institutions, which have been supporting and providing the funds for all the latest infrastructure developments – power, roads, bridges, airports, ports, pipelines, terminals, etc. The government needs some US$1trn of investments in the next five years (2013–2017) to maintain its high growth.

The government-owned State Bank of India is the country’s largest commercial bank. Its subsidiary SBI Capital is India’s leading investment bank and it provides the entire bouquet of investment banking and corporate advisory services.

SBI Capital has put India on the map of the project finance world. In 2005, SBI Capital topped the PFI league table for Asia-Pacific for the first time. The bank did not even feature in the top 10 in 2004. In 2006, the investment bank remained the region’s biggest lender and moved up to ninth in the global rankings table.

After that there was no stopping the busiest Asian PF bank. It topped the global tables in 2009 and remained there until 2011. Last year, cracks were beginning to appear in India’s fast growing economy and the effects of tight liquidity and lending limits to one sector were being felt. Still, it was not a bad year for SBI Capital, which continued to hold the fort as top lead arranger for Asia-Pacific but fell to second position in the global rankings as BTMU moved to the first spot. During this period, other Indian financial institutions, such as Axis Bank, ICICI, IDBI and IDFC, were grabbing positions in the region’s top 10.

SBI Capital is definitely one of the leaders in the area of project loan syndication and it has lent crucial support to the Indian infrastructure sector. It has led many project financing transactions, in many different sectors, such as the US$3.64 financing for Vedanta Aluminium, US$3.2bn for the Mundra UMPP, US$2.89bn for the Sasan UMPP and US$2.28bn for the Aircel telecoms expansion.

The investment bank used to be the merchant banking department of State Bank of India. Following the 1985 economic liberalisation under India’s late prime minister Rajiv Gandhi, the department was made into a subsidiary of the bank, and thus SBI Capital was set up in 1986. Its corporate headquarters is in Mumbai, the country’s financial centre. It has since then been actively hiring staff from different backgrounds, not just those with banking experience, but also those with engineering and management experience.

SBI Capital has one of the biggest project finance teams in the country. It has about 270 people in the group, who deal not only in PF structures but also private equity. Heading the impressive group is Supratim Sarker, the executive vice-president and group head. He heads the infrastructure group and leads project advisory and structured finance transactions. He has more than two decades of experience in investment banking and project finance.

Sarker is supported by six senior vice-presidents. Rajat Misra leads the project advisory and structured finance transactions in power and allied sectors at the corporate headquarters, while Vishal Gupta leads transactions in roads and the urban infrastructure sectors, besides corporate debt restructuring (CDR) advisory. Gopal Agarwal handles transactions in power and allied sectors and Rajesh Kumar Agarwal leads the oil, gas and energy sectors.

At the New Delhi office of the bank is Sanjeev Kumar Agarwal, who leads transactions in the oil and gas, roads and airports, telecoms and urban infrastructure sectors, while Mukul Modi manages projects in the power, steel and allied sectors, including the metallurgical /mineral mining sector.

The bank has put up a strategy for future growth as the government is putting emphasis on the structural reforms. India is poised for a new investment cycle and the capital expenditure requirements in various infrastructure and industrial sectors are expected to help revive the growth rate of the country.

An increasing number of companies are looking towards India as an investment destination. There is a growing and unprecedented interest shown by Indian corporates in the overseas markets. These companies are looking mainly for opportunities in natural resources, infrastructure (power, railways, port, etc), metals, fertilisers, etc.

The project finance division at SBI Capital is gearing up for all of these, putting up some strategies for future growth. According to the bank, it intends to have constant follow-up with government bodies for policy decisions to be prepared and updated for the new roles and maintain continuous engagements with all the major companies of the country to advise them on investments in India and abroad.

SBI Capital is not just looking at providing loans but it will identify or introduce alternative sources of capital for the ever-increasing needs of the infrastructure sector. It plans to expand its product offerings as well as its geographical reach to venture into the new growth phase. It is to offer new structured products in the infrastructure and project finance space suited for different stages of the project life cycle. These include bond issuances, IPOs, and other debt market and capital market instruments, and activities have been expanded to include M&A and private equity. It will bring new institutions such as pension funds, ECAs and credit enhancement agencies to the Indian market. With an increase in its investment banking activities, the bank is now among the top three players in the domestic bank market.

It cannot be denied that SBI Capital rides on the relationships that its parent SBI has with corporate India. More than 200 years old, the bank has a large base of customers, including big names such as Tata Group, the Ambani Brothers, the Jindals and many others. The challenge for SBI Capital is the search for new customers and clients, as it becomes an extended marketing arm of SBI. “We also act as ears and eyes for the bank,” senior vice-president Rajat Misra told PFI.

SBI and SBI Capital do not seem to have a limited budget in their lending. The budget depends on the liquidity position and “if we find a good project, the amount or size is not an issue”, Misra said. SBI Capital is a market leader with a large client base in various sectors, a wide knowledge base of the infrastructure sector, and a comprehensive range of services. At the same time, SBI Capital works with the project finance division of SBI to identify and execute various project finance deals. This synergy with SBI plays an important role for SBI Capital in strengthening its market share.

However the growth of non-performing loans is a concern. According to recently released India’s Economic Survey 2012-13, citing data from the Reserve Bank of India, the gross non performing assets (NPAs) of public sector banks have shown a rising trend in the last three years from Rs 599.72bn as on March 2010 to Rs1.44tr as on September 2012.

“The rise in the banks’ bad loans has been mainly due to the banks’ switchover to system-based identification of NPAs, slowdown in economic growth and high interest rate regime, it said. The bad loans on the banks’ books have mostly piled up from stressed sectors like infrastructure, textiles, chemicals, iron and steel, food processing, construction, and telecommunications,” the survey stated.

And so slowly the idea of debt restructuring has been embraced and a number of developers or major infrastructure players - such as GMR, Lanco and Suzlon - have started selling assets to reduce the huge debts. Many have restructured or refinanced existing debt with new facilities that feature lower interest rates and longer tenors. At the same time, the domestic banks were approaching lending limits, particularly to the power sector. New and innovative ways of raising funds were encouraged. Infrastructure debt funds were introduced but the take up seem slow.

As more and more Indian accompanies seek investments overseas, the bank intends to facilitate a tie-up between Indian corporates and overseas entities. This should help identify investment prospects for its clients in the overseas markets and aid the bank’s own diversification, a trend that has been evident in past two to three years.

SBI Capital has already been instrumental in making various international deals in the past few years. Its association with State Bank of India provides additional support in successfully executing international deals. SBI Capital has overseas offices in UK and Singapore and SBI is present in 34 countries through 173 foreign offices.

SBI Capital has concluded deals in Australia, Indonesia, Mozambique, Botswana and other Asian and Southern African companies. It is now working closely with corporates, banks and financial institutions in the Middle East, Brazil, Australia and Africa to make inroads in these geographies.

The bank is currently organising a round table with African Development Bank (AfDB) where all its corporate clients have been invited to explore business opportunities in Africa. It seems that Indian companies have acquired good expertise in infrastructure and project execution skills and it is an opportune moment for them to enter other developing and under-developed countries.