IFR Asia India debt capital markets Roundtable 2018: FIRST PANEL – Outlook for fixed income

IFR ASIA: Welcome everyone. Our first panel is an opportunity to assess the outlook for the Indian debt markets. Karthik, perhaps we could start with you on the state of Indian fixed income today. What is the impact from the troubles in the banking sector?

Karthik Srinivasan, ICRA: We need to first appreciate and acknowledge that India still remains a bank-driven economy. So, if the banking sector is not doing well, it’ll be really difficult for the other industries to do well.

We need not reiterate the challenges the banks are facing, but from a bond market point of view, we need to acknowledge that banks have a sizeable portfolio of their investments in CPs and bonds.

This year we’ve had some issues at the banks and rising interest rates, so in that context it’s not surprising that bond issuance volumes have been lower. There have been other structural changes and people have had operational issues. I think we’ll discuss those as the session goes on.

Having spoken about the negatives, there are a couple of positives which have happened over the last couple of years. One of the biggest is the new bankruptcy law, the Insolvency and Bankruptcy Code. While it’s still early days, the hope is that once things stabilise, maybe in another year or so, the confidence level of investors will increase and that will help the market over the medium term.

On the banking side, the regulator has been trying to clean up the sector. Under the IBC, the regulator has already forced banks to resolve two rounds of defaults through the NCLT [National Company Law Tribunal]. The timelines may be slightly delayed, but you would still expect a lot of bad debt to be resolved in this financial year. As these resolutions happen, there is definitely a possibility that the system would get to a position to look at credit or investments once again.

The other big development is the February circular from the RBI. We still need to run through a couple of quarters of pain, but the positive from that circular is – indirectly – about disciplining the borrowers.

IFR ASIA: The February circular, is that the one requiring disclosure of any late debt payment?

Karthik Srinivasan, ICRA: That’s right. We’ve always had the mindset of treating borrowings from the debt capital market in one way and borrowings from banks in another. So the February circular – though not everyone will like it – from a structural point of view, is positive. It’s trying to build in the discipline, not only that lenders need to report it, so that at a broader country level one is more aware of the systemic risk, but also that borrowers can’t take one set of lenders for granted.

So in the near term pains will continue, but I think structurally things are moving in the right direction.

IFR ASIA: Srinivas, perhaps I can come to you. If the banks are constrained, does that mean that more borrowers are looking into the bond markets? What kinds of options are open to them?

Srinivasulu Yanamandra, Barclays: Good morning everyone. It’s an interesting question, what options are there if banks are not lending? Clearly, the answer is the bond markets, but we aren’t really seeing bond issuance in any meaningful volume.

I was telling someone this morning that there are 10-plus banks all at number one in the high-yield-bond league table, because there’s been only one issuance in the first half year! That tells a story in itself. Bonds haven’t been easy to do.

So what is the ultimate solution? Right now bank liquidity is still available, especially in the dollar markets, for the stronger borrowers. Bank markets always lag bond markets. The bank markets were more expensive than bond markets for the whole of last year, but this year bonds have been more expensive, due to both global and domestic factors. So borrowers that can get liquidity in the loan market are going down that route.

The syndicated loan markets have seen massive volumes this year. We’ve seen quite a few banks and a large conglomerate hit the market, and other large corporates lining up. The recent change to ECB [external commercial borrowing] regulations has also opened this route of borrowing to housing finance companies, for example.

On the bond side we’re seeing more interest in rupee bonds, because the dollar bond markets haven’t been attractive.

Those with offshore parents still have some options available. But for infrastructure players looking to repay rupee loans, dollar borrowing is literally not an option. Then there’s a pricing cap of Libor plus 450bp, which in today’s market is hard for Double B rated entities… There’s a tenor restriction as well.

So what are the options? In this market if you have to borrow dollars and you have the flexibility of an offshore vehicle, then you’re looking at shorter tenors, probably three or five years may work. A floating-rate issuance may also work better in this market than a fixed-rate issuance.

On the domestic side, again, duration is still strictly off the table. We are limited to three or five years and I think low-rated issuers will still struggle. Banks still have to bear the brunt of support for the corporate sector, and we’ve seen some positive movement on that front in the last month or so. That should give the market a good background going forward.

IFR ASIA: Rashmi, have you seen the availability of funding shift in recent months?

Rashmi Mohanty, Vedanta: Yes, the availability of funding, actually it keeps changing. It’s something that keeps a treasury person on their toes.

As we look at the funding options available I think it’s important to understand diversification is the key. I’ve been a treasury person across three large groups and a lot of cycles. I’ve seen that there is no right or wrong borrowing mix that you can have. At some point in time you will have predominantly bond borrowing in your portfolio. At the other points you will have to just completely rely on bank borrowings.

So it’s important to, number one, be ready – from a regulatory perspective, from a process perspective – to be able to tap into whatever is available, whether it’s a bank loan, whether it’s a bond, whether it’s commercial paper. Two, have an understanding of the product and be always connected to the right people, to the investors, to the lenders and the bank market and never at any point in time shut any doors.

We’ve just seen the last one and a half years, two years probably, I would say, where the banks have been going through a lot of stress and therefore liquidity from the bank market has been selective. Not so much for Triple A, Double A rated corporates but, yes, for lower-rated corporates it’s been a challenge.

Over a longer period, if you see bank loans have always been available, I think the first thing is keep your portfolio diversified and that’s exactly what we’ve been doing. We had a great first quarter, for example, where corporates were able to issue and get access to abundant liquidity from the bond markets, and then suddenly, the last three months, markets, even the rupee markets, have been completely dead, hardly any issuance at all.

The second thing is have a portfolio where you have the flexibility to come out of a product as much the ease to issue it. That means having fixed rate, floating rate, a good mix of products that can allow you prepayments. That’ll help you switch into attractive products when there is availability of those kinds of products in the market. I think that’s very important.

There are times of abundant liquidity where you can deal directly with investors. There’ll be periods where you will need aggregators, you will need intermediaries to get you that liquidity. That also is a part of the strategy that any corporate treasurer will have to keep in mind.

My own belief is that when you’re out in the market you’re not competing against a double A or triple A rated corporate. You’re actually competing against the government of India, in the form of government securities or bonds issued by PSU companies [state-owned enterprises]. They decide the price in the market and that dictates the entire curve, and the appetite for your paper in the market gets determined by what they are issuing at the time.

So our competition is not really other corporates, it’s the government of India. So you’ve got to really keep all of these things in mind as you start planning your funding for the year, for the quarter and your cash flow.

IFR ASIA: You mentioned the local markets have not been very active. Nipa, is this your experience as well? What’s the core reason? Is it the rising yields or is it something else?

Nipa Sheth, Trust: I think it’s a variety of reasons. Over the past two years, we have seen the Indian capital market react to the effects of demonetisation and a bout of uncertainty, combined with a rush of liquidity and system adjustments. Furthermore, the rupee was strengthening, and capital market instruments were priced aggressively. This was followed by the cash management bill issued by the RBI and RBI’s change to a neutral policy stance, triggering a significant rise in yields on debt securities.

This phase of adjustments around pricing posed a significant challenge for the debt capital market. The post-demonetisation phase saw an excess of cash in circulation as compared to the pre-demonetisation period. Pumping in liquidity would have possibly bridged this gap, and stabilised the markets.

As the bonds were bought at a very aggressive price, without investors realising that the effect would be short-lived, the huge mark-to-market losses meant the risk appetite of most traders went rock-bottom, owing to ambiguity over the next phase of the interest rate cycle.

Additionally, the banks’ capitalisation went through a tough time and therefore their participation in the bond markets went to significant lows.

The past quarter emerged as a complete contrast to what the markets had anticipated. This is the phase where money-market instruments became most important. Volatility in returns drew corporates and SMEs to direct investments. Masala bonds and dollar bonds had started picking up, so the bond market was looking at another avenue. Exactly at this time we had the emerging markets currency issue.

Therefore, I think both pricing, as well as liquidity, are the market driving forces.

IFR ASIA: Thank you. Lakshmi, we just heard that money managers are replacing banks. What’s top of the mind then for an investor, money manager such as yourself? Is it any of these issues or perhaps something else?

Lakshmi Iyer, Kotak AM: Hi, morning everyone. Firstly, who says that on a rainy day there can’t be sunshine? For the bond markets, the mutual fund industry has actually been a ray of sunshine in a period that, as most of the panellists have observed, has been very gloomy.

We have seen a significant pick-up in the activity levels of mutual funds in the corporate-bond markets. Total issuance in FY2018 was about Rs6trn (US$88bn). Of course the number was much higher last year, but it’s still the second highest on record in the past 11 years.

Number two is total CP issuance for the entire FY2018 actually totals the entire size of the mutual fund industry – about Rs23.5trn or about US$350bn. So that’s clearly telling you that the liquid money-market funds, the mutual funds, are actually participating in this industry.

If I give you a breakdown of this $350bn, the predominant assets under management are actually in fixed-income funds or debt funds – about $250bn–$260bn. Again the sunny part of the story is that the mutual fund industry is growing at a CAGR of 25%–30%.

Very recently, maybe in the last three, three and a half years, the fulcrum of the growth is centred around equity funds, but if you take an accumulative period of, say, the last seven to eight, nine years, the fixed-income funds have clearly led the way.

I think that leads on to another point, about a subset of fixed-income mutual funds popularly known in the Western world as junk bond or high-yield funds. While we don’t really have junk bond funds in India, there certainly has been an increase in the growth of high-yield-bond funds. As we speak, this category totals close to about $25bn, which is almost 10% of total fixed-income assets under management.

I think that’s clearly suggesting that while most of the public-sector banks have gone into hibernation, mutual funds have risen to the occasion. I don’t think it’s fair to say that they have replaced the banking sector, because banking credit outstanding is close to about US$1.3trn or about Rs86.5trn. It’s very difficult to bridge that gap overnight, but I think it’s heartening to know that the gap is coming down in a substantive manner.

The asset management industry is benefiting incrementally from the post-demonetisation financialization of savings. That could lead to more monies moving not only into equity as an asset class, but to a general reckoning that there is life beyond fixed deposits. I think that will be the way going forward. So don’t worry too much about the rainy days, sunshine is here.

IFR ASIA: That’s a nice upbeat assessment. If the money under management is growing so fast then that should be pushing yields lower, shouldn’t it? There should be more money coming in to fixed income. Does anyone have a view on why that’s not quite happening yet?

Lakshmi Iyer, Kotak AM: Rashmi pointed this out very well, that corporates are competing with the big daddy, which is the government of India. If you see the entire period in the last maybe three months, six months, 12 months or even 15 months, you’ve seen the government securities yield go up consistently, despite the fact that in August 2017 we actually saw a rate cut. The yields have actually moved up exactly on a year-on-year basis almost 150 basis points.

In that same period if you see the corporate-bond yields, though they have moved up marginally, you’ve actually seen the spreads compress. So that is where the mutual funds step in, where we have seen a reasonable compression of spreads because mutual funds have acted as catalysts.

The sceptics might always say that it’s a mispricing of credit, but I would say that corporate India is trying to find its suitor. Earlier it was just wedded to one spouse, which was the bank. Right now in Indian parlance, there is something known as Swayamvar, where the bride can choose her groom.

I think the Indian corporates are out in the market to look for their suitor. That has led to reasonable compression. Yes, one needs to be aware that if the underlying market is not very stable, it is very difficult to assume that the corporate-bond market, which derives its yield from the government markets, can really stabilise.

IFR ASIA: You mentioned high yield earlier. Srinivas, when we talk about high yield in India, where does that fit in with the global high-yield market?

Srinivasulu Yanamandra, Barclays: So global high yield actually has worked out well for India over the last three to five years. In my view, five years back, probably the only high yield out of India was Vedanta, which used to be the most prolific borrower, a very strong credit with a very strong fan following amongst investors.

We have seen diversification and now we actually have a curve. It used to be harder to pinpoint pricing on a new Indian issue, but over the last three years we’ve had significant issuance in the high-yield space as well.

The last two years have been a borrower’s market. Indian borrowers have been able to raise funds at extremely tight spreads, whether it’s a bank borrower or a corporate borrower. Indian banks, at one time were trading almost at par with Chinese banks, which were rated three or four notches higher.

That also speaks of the technical positioning. If you’re an Asia fund manager with 60%, 70% issuance from China you need diversification, so you would seriously evaluate deals from India, which helps with lowering prices as well.

From that point, I think since January there’s been a reversal. Investors now are exercising more optionality. They’re being more selective, as someone mentioned earlier, and yields have backed off.

Therefore while high yield is an option, I think in the current spread environment issuers are not yet even psychologically prepared to pay a yield of 6.5%, 7%. People haven’t adjusted still to swap rates being at 3%. If you tell someone L plus 350, probably they’ll say that’s a good rate. If you swap it and say 6.5% they’ll say that’s too expensive. It’s still a psychological thing. People are not yet accepting the reality that rates are much higher right now. That’s playing out. So therefore people are still sticking to the bank markets.

So the high-yield markets are there. Investors are willing to look at credit, they have liquidity, but they’re asking for higher pricing in line with the risk that they’re assuming.

IFR ASIA: Karthik, you were talking before about the importance of the bankruptcy regime. Is this something you see as some short-term pain for a long-term benefit?

Karthik Srinivasan, ICRA: I think it is clearly a case of short-term pain for a long-term gain. We always had challenges in terms of enforcing security and getting recoveries, should the need arise, the borrower goes belly up, or bankrupt, or there are challenges. Now systems have been put in place.

It’s also important to note that for India it’s still early days. The processes are still being tested out. Theoretically, you should see some resolution of the accounts under the bankruptcy court by the end of this financial year – one way or the other.

IFR ASIA: Does it increase the risk of more sudden shocks for bondholders, if banks push more borrowers through an insolvency process?

Karthik Srinivasan, ICRA: I think investors are happy with the fact that the insolvency code is there now. It used to be one of the big sore points for global investors. Yes, some haircuts have been 80% but also there have been cases of full recovery. So it’s worked in that sense. I think investors will be happy with the current situation.

Our own estimate is for a recovery rate for lenders of 50%-60%, in line with the RBI mandating the banks to make 50% provisions. That should to some extent at least protect the banks from any further balance-sheet shocks.

The downside risk is in case the resolution does not happen, or the haircuts that finally end up being taken are much bigger, then you don’t have a choice today but to rely on the government for funds. I mean at the current valuation it’s really going to be difficult for a lot of entities to raise external capital.

I think by the end of the year, if I’m not mistaken, close to 50% of the NPAs in the banking system will be out. That is a very significant statement to each and every global investor. It’ll give great confidence in the system.

IFR ASIA: The other regulatory change that a lot of people have mentioned is the move to electronic bidding platforms. I’m interested in the panel’s view on what an impact this has had on issuance.

Rashmi Mohanty, Vedanta: I think these kinds of things are a welcome move. Definitely, the more you use technology for such processes, it’s good to have.

I would say as a person who’s used and experienced the platforms, and it is something which is very recent, at this point in time it’s still evolving. Deals still happen offline and they go into the electronic platforms as a planned kind of bidding thing. It isn’t electronic bidding that can change the way the market operates; there are fundamental things that need to be corrected in the market for electronic bidding to really become successful.

I think all the panellists here have talked about how we need to get some more investment avenues for corporate debt. I think Lakshmi made some good points about how the mutual-fund market has supported the corporate-bond market. They’re also limited by the tenors that they can do.

The reason for that ¬¬– and probably it’s deep rooted in the India psyche or the Indian mindset – is that for us long-term investments are made more with a view that in the long run things will sort themselves out. So the only long-term investment avenues that we use are things like real estate, gold, equity. No one really puts their mind to doing long-term investments on the fixed-income side other than insurance and pensions. They’re not supposed to be fixed-income investments, they’re meant for certain other reasons, but that’s the only investment that you will see in India that is really a long-term fixed-income investment. And therefore the market is limited by the source of funding for investing in long-term corporate debt paper.

But whatever available money from that sector needs to come into the corporate-bond market, and we can talk a lot about what IRDA [Insurance Regulatory and Development Authority] should do and what the pension fund authorities should do about it.

Back to the electronic thing, there are fundamentals that need to be corrected in the market itself for these kinds of platforms to be really effective for both the borrower and the issuer, as well as the investor.

Lakshmi Iyer, Kotak AM: Additionally, the EBP has brought about a lot of transparency, so the issuers or lenders to the ultimate credit are able to understand or know in advance the issuance available etc. The unfortunate bit is also the timing, because it’s come at a time when there’s so much gloom around. So there is genuinely no interest in price discovery.

So ideally, an EBP kind of platform should in a good market pull the prices down, as in pull the yields down, or vice versa.

As Rashmi pointed out, since quite a few of them, or most of them, are private placement, pre-negotiated, it becomes very difficult. I think probably we need to wait, it is just too early. Of course the intended objective of bringing about transparency has been achieved, but the price discovery at the heart of EBP, I think that seems to be missing.

Another critical thing is whether you’re doing plain vanilla issuance, so if Vedanta issues a bond or XYZ issues a bond it’s a plain vanilla bond. The prospectuses are uploaded obviously a day or two in advance. If it’s a complex structure, if it’s a complex credit that has got tight covenants etc., it just becomes humanly impossible as a fund house or any other stakeholder to really analyse every aspect of it and make a bid.

That credit evaluation takes a little bit of time if you want to ensure no NPAs are in the mutual-fund system also.

I think therefore the EBP has some more ground to cover. It’s just a small beginning.

IFR ASIA: So it’s not something we should abandon. It’s not something that’s caused too many problems.

Nipa Sheth, Trust: Of course. The new bidding norms are aimed at achieving better and more transparent price discovery in the bidding process. However, due to the stringent guidelines this platform seems limited to big investors and issuers. It would essentially turn out to be just a price-matching platform.

Owing to this, aside from the most active mutual funds or banks, if an issuer wants to tap any other investor, a public issue would probably be the best choice. The EBP guidelines need to be eased to allow the market makers or arrangers to play a part in the system. The infrastructure requirements are a challenge for some investors. For the rest of the market, I think very clearly the direction is to move part of the issuance towards public issuance.

IFR ASIA: As it stands at the moment, it seems the arrangers are being taken out of this process. The classic syndication, bookbuilding, price discovery process has gone. Is that right?

Nipa Sheth, Trust: Absolutely. It’s been a tough market. There’s been hardly any issuance from PSU borrowers in the first quarter. It’s a system of change, but I believe most of them will now start looking at public issuance.

AUDIENCE: Good morning. I represent the Swiss stock exchange in India. My question is regarding the drop in international bond issuance. A question to Rashmi: from a borrower’s perspective, how important is investor diversification, especially across investor classes or new geographies in such a scenario?

Rashmi Mohanty, Vedanta: That was my first point about how you plan your funding strategy. Diversification is very important and diversification is not something that you think of in a tough market. Of course, you don’t have a choice and you start looking for alternative sources of funding for yourself in a tough market. You will then in that case dip into whatever is available.

It’s something that has to be an ongoing process. It’s not something that you just pick up one day and you drop it the next day because your favourite bankers are back, queuing outside your office. It’s something that has to be a strategy through and through and therefore looking at alternative markets, doing investor diversification, definitely is something that I’m sure, not just us, but every corporate treasurer and every large corporate keeps planning and thinking about.

AUDIENCE: Good morning ladies and gentlemen. I represent a company that builds soft and social infrastructure, like hospitals, schools, highway rest areas, working women’s hostels. Essentially, it’s a unique proposition. It’s not quite infrastructure, nor is it real estate because there is annuity and growth. Where do you think we can raise the kind of debt capital that we require?

Srinivasulu Yanamandra, Barclays: I think you will have appetite from mutual funds for a situation like the one you mention, and Lakshmi can add more here. You’ll have to take time building out your credit story and convincing them. You should get yourself a rating that will help you have credibility and it’ll help put out the story. In our interactions the mutual funds are very keen to look at new credits. They also want diversification from an issuer standpoint. I think that would be my suggestion.

Lakshmi Iyer, Kotak AM: There is this curiosity around new asset classes within the fixed-income piece. Renewables, for example, are a classic case in point. We’ve already seen three renewable alternative energy source borrowers come and refinance their debt from bank lines to predominantly mutual funds and, selectively, insurance companies.

Annuity-based projects have been a favourite of the mutual-fund industry for two reasons. One is most of the projects have had the government of India or a quasi-government entity as the counterparty, so there has been significant interest. The other critical thing is the growth of a category called hybrid funds. These hybrid funds are essentially a combination of debt plus equity, which could be in the form of monthly income plans. So this category also has seen significant growth, which is why you have seen a few InvITs [infrastructure investment trusts], just a couple of them. REITs are yet to be introduced in India, and the first two InvITs have not been good experiences for the end investor. The third InvIT that was issued again found reasonable demand.

It’s not that everybody is meeting with overnight success but there is clearly a case to tap the capital markets with these kinds of innovative structures. For mutual funds, the longest term would be three, four or five years. If you want 10, 15 or 20 years obviously banks and insurance companies or PFs would be a better option, but clearly mutual funds at least in the last three to four years have been waking up to innovations. We have seen so many new structures obviously in collaboration with the issuers seeing the light of day.

Rashmi Mohanty, Vedanta: I’ll just make a comment here that’s relevant to the question that you asked. For the banks and whatever turmoil that they’re in, you have to still credit them with the fact that over the last many decades they have been a quasi-credit rating agency for the investors. I say that from experience, if you’ve been able to get and source a banking line from a PSU bank, in a way it’s a stamp on your credit, which is where the mutual fund and the other bond investors would look at your credit as well.

I think that hasn’t changed. Or it has changed only marginally, where rating agencies have started playing a good role out there, where they are sitting down and having very engaged discussions with issuers, trying to understand the credit and the credit notes and the credit appraisals. The way they’re now looking at it and the way they write the credit rationales is a lot different from what they were doing about six, seven years, 10 years back. When it’s very detailed, people like Lakshmi can read through that, can engage with the issuer and have a better understanding.

So I would say for a company like yourselves you can’t just depend on the bond market and say, “Let me reach out and do a three, five-year bond for the time being.” That’s maybe not the right thing.

You will have to reach out and see all the possible avenues. You will have to probably take some banks with you to fund your projects. You will have to probably reach out to a rating agency to be able to assess and give a very independent opinion, a neutral opinion about your credit so that people like Lakshmi and Srini are comfortable with your credit and can then guide you with the kind of structures that can be done.

The best part is, as Lakshmi mentioned, that from a structure perspective things have been really interesting and creative. There are lots of new ideas that have been introduced in the market. So it’s not just a plain vanilla bond with a pure credit-risk assessment being done, cash-flow based InvIT, REIT etc., there are so many other structures that are now in the market.

IFR ASIA: How does it work if you are a first-time issuer looking to sell bonds? You can’t just go straight to the bond platform and put something on the screen, presumably, can you?

Nipa Sheth, Trust: I agree with Rashmi’s point that the bank market or even an NBFC [non-banking financial institution] works as the first stepping stone for most borrowers. Unless if it’s a cash operational project or has a cash flow of more than five to 10 years, it seems a bit difficult to enter the bond market - because the terms of the trade are very stringent. Therefore, one would essentially turn to an alternate market to lower the cost of funds, provided the cash flows are in place. This is where I strongly believe that the rating agencies and market specialists would have a crucial role to play - in guiding on the selection of the correct rating and funding mix to access the market. That should be the right approach.

AUDIENCE: I work in the area of stressed power projects, and the question is for Karthik. What happens in the bankruptcy case under NCLT when lenders are expecting at least 20 cents on the dollar and the bids come in at 8 or 9? If they don’t accept, then probably the asset might go into liquidation and that would be the worst outcome.

The second question is for Lakshmi. What kind of check on the underlying asset quality is being done before mutual funds refinance long-term projects?

Karthik Srinivasan, ICRA: As I said, it’s still early days for the India market as far as IBC and NCLT goes. We’re still going through a lot of teething issues. Let’s say banks actually lose out on one or two assets where they would have got bids at 20 or 30, but finally it goes to liquidation and they get 3 or 4 cents. Maybe the next time better sense prevails and they settle for 20, you never know.

Should that be the order of the day, then one is in a really deeper mess because a lot of assets are in public-sector lenders, the entire stress is there. Then you would really need a significant amount of sovereign support to bail out.

We do believe the government wants the economy to pick up pace. So for that you don’t have a choice but to have an Indian banking sector in much better shape. Mutual funds and insurers are growing quickly but you’re talking about Rs30trn-Rs35trn of non-bank debt as compared to about Rs80trn-Rs85trn of bank credit. That gap is definitely narrowing but it is going to take a long time. It has to be about getting the banks back into shape so at least they can resume lending.

Lakshmi Iyer, Kotak AM: On the underlying security check, two things are worth mentioning here. In comparison with the banking industry, the non-performing assets in the mutual-fund industry can be counted on your fingertips. In the last three years it’s been not more than three names, one was a big amount, the others were a few million dollars. I think the genre or the vintage of the mutual-fund lending book, in terms of credit profile, the fulcrum will be around the double A, double A minus kinds of rating metrics.

I’m not saying that rating is the only factor that mutual funds look at, but it’s definitely a goalpost. It’s like a hygiene check. It is a necessary condition.

The second thing is that mutual funds, in general, rarely lend on a non-collateralised or an unsecured basis, unless it is to the largest mortgage lender in the country or maybe the largest auto manufacturer in the country. The bulk of the asset lending is collateralised, and that collateralisation can range from fixed assets to shares, which are more liquid than the receivables that underpin NBFC lending.

I think by and large it is reasonably safe to say that because of the tight nature of collateral, including the real-estate sector, where there is a physical asset or there’s a cash flow attached to it, the tight structuring of the asset-management industry should hold it in good stead, even though it refinances at a marginally lower rate than the banking sector.

AUDIENCE: I would like to understand what happens to infrastructure companies that have a growing order book but are completely stressed. How do these companies raise any kind of finance to fulfil their order book?

Rashmi Mohanty, Vedanta: You would need to segregate your new orders and your new contracts and demonstrate that you have the ability to execute those orders at a certain healthy IRR – irrespective of whatever you’ve done in the past. If you can segregate the cash flows from your new projects, provided you have the provisions in the earlier agreements to allow it, then you can use some of these interesting structures we’ve been talking about to create something that investors would like. I think that’s one way to look at it.

Srinivasulu Yanamandra, Barclays: You have a new category of investors. Credit funds are picking up in India. So those are really the first port of call for something like this. Where there is stress but there is an underlying value, these funds are set up to analyse that. As Rashmi said, come out with ring-fencing for the new projects if your other lenders allow that. If there’s that optionality, then credit funds and some of the NBFCs also specialise in this. It’s not a product for regular mutual funds or some of the banks.