Shadow lender Srei quits infrastructure, blaming ‘socialist’ India

Srei Infrastructure Finance Ltd. plans to stop financing Indian infrastructure projects after three decades in the business, as a slowing economy and crisis in the shadow bank sector dries up funding lines.
The International Finance Corp.-backed firm will instead focus solely on financing purchases and leasing of equipment, Vice Chairman Sunil Kanoria said in an interview in his Kolkata office. Srei has tied up with eight banks that will fund 80% of each project while Srei will finance 20%, reducing Srei’s need for capital.

“We have understood India the hard way,” Kanoria said. “We have realized that infrastructure is a government job. India being a socialist economy, we should let the government do it.”

Srei’s decision, at a time when Prime Minister Narendra Modi is banking on private companies to contribute a quarter of a planned $1.5 trillion investment pipeline, highlights the pain non-bank financiers are facing 17 months after the collapse of the IL&FS Group. Construction of roads, ports and power plants is seen as key to revive an economy growing at the slowest pace in a decade since the failure of the shadow lender.

At the time of IL&FS collapse, Srei’s equipment finance business was at its peak, adding Rs 1,500 crore ($210 million) of assets each month, Kanoria said.

However, a few days after it won regulatory approval to list Srei Equipment Finance Ltd., Modi’s government seized Infrastructure Leasing & Financial Services Ltd., triggering panic among mutual funds that had been providing credit to shadow lenders, which then spread to the stock market.

Srei’s shares have lost about 80% of their value since then, and the equipment-financing business is down to Rs 300 crore a month. Srei cut headcount by 32% to 1,500 though it may hire as many as 200 employees for the equipment operation.

“Post the IL&FS crisis, access to funds is limited and access to capital is virtually not there,” Kanoria said.

In the year through September 2019, Srei’s infrastructure lending book shrank 33% to Rs 12,560 crore while its equipment book dipped about 7% to Rs 31,690 crore.

A string of government, regulatory, and court decisions have also impacted the infrastructure sector and Srei’s business, including the cancellation of permits to mine coal, higher fees imposed on telecom companies, and long arbitration for road disputes.

“There are arbitration cases going on for several years,” Kanoria said. “When government does not pay, they expect you to pay on time. And if you don’t pay then you are branded as a non-performing asset and a crook.”

Still, the distressed valuation of infrastructure assets is attracting some investors. Deutsche Bank AG is offering to buy the debt of an Indian power producer at a discount of about 70%, according to people familiar with the matter, while Varde Partners said it’s looking for opportunities to invest as financiers struggle.

Finance Minister Nirmala Sitharaman last month said lenders were finding it tough to take decisions on concern that agencies would investigate them for impropriety, and added that authorities would differentiate between genuine commercial failure and criminal culpability. She has also blamed the political opposition for instigating street protests against a new citizenship law based on religion.

“We had an economic challenge, now we also have a social challenge for the last three months. Is there any investor who will come?” Kanoria said. “We don’t want to be in infra. That’s a very clear message.”