BW Communities

_Dreams Suspended

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Cash Crunch: With few financial options available, boosting economic growth through investment in infrastructure seems a distant proposition (Pic by Satheesh Nair) The best-laid plans, to paraphrase the poem, often go nowhere. The government’s plans to propel infrastructure spending from the current 5 per cent of GDP to 9 per cent by 2011, is hitting one such dead-end. An estimated Rs 9,84,500 crore ($203 billion) of debt funds alone is needed to finance that. Given the liquidity crunch, where will funds of such proportion come from? The answer is more complicated than it appears. Apart from the Infrastructure Development Finance Corporation (IDFC) — that specialises in infrastructure lending (debt and equity) — commercial banks, non-banking finance companies (NBFCs), insurance firms, and external commercial borrowings (ECBs) are other sources of funds for infrastructure projects. Also, the India Infrastructure Finance Company (IIFCL) was set up in 2005 to extend long-term finance. While that seems like a long list of lenders, in reality, banks hit their group exposure (see box) limits very fast as far as infrastructure projects are concerned, insurance and pension companies are stymied by rating requirements, and the government’s IIFCL-routed interim measure is just that — a stopgap in a long haul. Meanwhile, on 23 December last year, IDFC’s managing director Rajiv Lal made a presentation to the government, highlighting serious problems in infrastructure finance, which involve asset-liability mismatches, exposure limitations, and prudential norms. And Prime Minister Manmohan Singh told Parliament last year that sources of funds such as ECBs, and also working capital funds, had dried up. With most financial doors closed, boosting economic growth through investment in infrastructure, in the current slowdown, seems distant. Small Banks, Big Problem Lal notes that “Indian banks are relatively small. Only 11 banks had equity above $ 1 billion (Rs 4,900 crore) in March 2007 — of which two were private sector banks. State Bank of India (SBI) had just over $7 billion of capital in March 2007.” The total equity of the 82 scheduled commercial banks (including 29 foreign banks) was $ 49.8 billion. “Thus, there are many small banks, most of which do not engage in infrastructure lending, and the handful of banks that are actively lending to infrastructure are likely to reach exposure limits if they continue lending at this pace.” Meanwhile, group exposure guidelines of the Reserve Bank of India (RBI) also limits a bank’s exposure to any group, to 50 per cent of its capital funds. This ceiling can be breached very quickly for companies specialising in infrastructure projects. For instance, a group company with two ultra mega power projects (of Rs 20,000 crore each), and a Rs 1,000-crore road project executed through separate special purpose vehicles (SPVs) can require debt funds to the tune of Rs 29,000 crore. So, RBI’s group exposure cap limits developers to their bank’s exposure ceiling. In fact, although remaining within the RBI’s domain, in December last year, the Prime Minister’s special committee on the stimulus package considered a possible relaxation of the group exposure requirement of banks, for the next 18 months. But given the sensitive nature of the matter, sources in RBI say, there is status quo on the norms for infrastructure. {mospagebreak}   VISIBLE CONSTRAINTS (Pic by Subhabrata Das) DEEPAK PAREKH COMMITTEE: Stepdown subsidiaries — created to execute a particular infrastructure project without any dependency on the parent whatsoever — do not involve cross holdings… banks’ lending to these subsidiaries is not vulnerable to the bankruptcy of the parent… there is thus a strong case for removal of exposure to such subsidiaries from group exposure limits. (Bloomberg) RAGHURAM RAJAN COMMITTEE: Sectoral caps and limits on single and group borrower exposure will place further constraints on financing (of infrastructure). While it might be tempting to relax prudential norms in the cause of infrastructure, this would simply be wrong — infrastructure finance can be risky, and it would be short-sighted to sacrifice the health of the banking system on the altar of infrastructure finance. Feeble Alternatives If group exposure is one major hurdle in raising funds for infrastructure projects through banks, insurance and pension funds, also a source of long-term funds, are equally unenthused about lending to the sector. Lal during his 23 December meeting with the government said, “With the exception of LIC, insurance companies, pension and provident funds rarely invest in paper with a maturity longer than five to seven years”. In fact, projections show that barely 5-6 per cent of the total debt funds needed for infrastructure come from insurance companies. Lal also says insurance funds would not be available as the Insurance Regulatory and Development Authority’s (Irda) investment guidelines call for project rating of not less than AA. Generally, infrastructure projects that depend on, say, toll collections or airport traffic get a BBB rating. Projects with minimum guaranteed revenue (like an assured offtake in power projects) get a higher rating, a source in the infrastructure sector explained. Therefore, important road or national highway projects would carry only a rating of BBB. Infrastructure projects are structured and financed very differently from other ventures. They have large upfront capital costs where lenders (who provide 60-70 per cent of the project cost) are repaid only from the project’s revenue stream — toll collections in the case of highway projects. Added to this, huge infrastructure projects are executed through SPVs or individual project companies and cannot bank on the parent company for guarantees (non-recourse). Therefore, the credit rating of the project company is solely dependent on the revenue stream forecast lasting for the concession period of 15-20 years. The Interim Measure In the stimulus package announced on 2 January, the government allowed IIFCL to raise Rs 10,000 crore through tax-free bonds for refinancing bank lending of longer maturity to “eligible infrastructure bid-based PPP (public-private partnership) projects”. The very fact that IIFCL’s refinance window is for port and road projects is a tacit agreement that bank funds are not available for such projects. Speaking to BW, the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, clarified that “shortage of long-term funds is a key constraint and (therefore) the refinance proposal will provide immediate help”. According to officials, this (refinance window) is purely an “interim measure”, and the bonds would provide a relatively cheap source of debt finance. If the amount raised adds up to to Rs 40,000 crore, it will enable infrastructure investments of about Rs 1,00,000 crore (debt and equity together). But this is still a far cry from the Rs 9,84,500 crore of debt funds needed for the infrastructure sector, by 2011-12. Will things change? As Lal says, “...the alternative is to leave the government to build the country’s infrastructure or just be reconciled to not building as much infrastructure as we need”. kandula(dot)subramaniam(at)abp(dot)in (Businessworld Issue 13-19 Jan 2009)