Banks & Indian Infrastructure Projects

Recently, the India Infrastructure Company Ltd (IIFCL) has bagged sovereign guarantees for raising Rs 5,000 crore for funding big-ticket projects in the country and some MoUs were signed by IIFCL with the three public sector banks — Canara Bank, Vijaya Bank and Syndicate Bank, with an option of raising the funds either from the domestic or international markets.

This will be also done though several global venture capital funds by extending the funds to the IIFCL either direct debt or in the form of equity.

IIFCL's funding for projects would be in the form of direct participation in project loan syndications along with the banks or in the form of refinancing support to the lending institutions. This was because bank finance for infrastructure was likely to face asset liability mismatch problems in view of the long lending tenures. The MoUs with the three banks involved providing IIFCL's support in their project lending efforts. This included participation in big-ticket loan syndications. IIFCL would function on the basis of the credit appraisal and due diligence reports of the banks.

Till date, Canara Bank was lead bank in 13 projects, Syndicate Bank was the lead in four projects and Vijaya Bank was the syndicate leader in two projects. So far, IIFCL had signed 10 MoUs with banks and financial institutions. Banks such as Canara Bank and Vijaya Bank already have substantial exposures in infrastructure projects that include power, roads, telecommunication and urban projects. as for instance, Canara Bank now has an exposure of Rs 12,000 crore in the sector and it intended pushing up this figure to Rs 20,000 crore by this year end. Vijaya Bank's exposure is Rs 3,500 crore in the sector.

Some concerns like assets liability mismatches (ALM), other lending risks, risks in project financing, the risks involved interest, liquidity and credit risks etc. could be eliminated with the participation of IIFCL, as ther would be no fixed rate lending for projects. Lending would be on commercial terms, that could involve floating or periodic resets in loan covenants.

The curent statistics reveal that funding requirements for infrastructure was estimated at $360 billion or about Rs 3 lakh crore per annum. Even assuming a conservative debt equity ratio of 3:1, bank funding would have to be at least Rs 2.25 lakh crore each year. As per reports, these investments in infrastructure were necessary to sustain the high GDP growth of 9 per cent.

Hence, I feel that there is no risk associated with the funding source since as mentioned above, small capped players will play their role safely with the aid of big players like IIFCL.

Explicitly modern concession agreements speak about the significant role played by lenders in deciding the flow of funds and ensuring their right and timely utilization. Effective implementation of 'Equador Principles' in Indian Infrastructure would fetch long term benefits. Lenders ofcourse would be able to contribute to streamline the projects since they are a fundamental part of Project building. The Government has also realized these facts and would be keen to keep up with the pace of FDIs and hence should encourage more participation of International + National Financial Institutions in Indian Infrastructure Projects.

It is upto the Policy Makers and Decision Imposers to take an advantage of this current scenario before the fruits are ripped off!!!!