A breather for infrastructure

If infrastructure financing has been in the throes of policy vicissitudes for a long time, a few changes proposed by the government are innovative in some sense and plain extraordinary in other ways. If one goes by what Finance Minister Pranab Mukherjee said late last month, the proposal to allow India Infrastructure Finance Company (IIFCL) to start take-out financing will be a first of its kind in India. Take-out financing essentially serves the purpose of ensuring that funding requirements of infrastructure projects come in time. Big infrastructure projects are dogged by poor financing by banks and financial institutions. IIFCL will be able to take a big part of bank loans for an infrastructure project onto its own books when the government finalises the arrangement. By all measure, by the time this edition goes to bed, many of the infrastructure projects will breathe a sigh of relief.

The take-out financing scheme has been approved by a government panel, and was awaiting finance minister’s approval before implementation. The problem with infrastructure financing is that banks have funds that mature in medium term and financing long duration projects with such loans causes sharp asset-liability mismatch. Take-out financing allows banks to circumvent the problem by sanctioning medium term loans for about five years with the understanding that another specialised institution will take over the loans from them within a fixed period. In infrastructure financing, commercial banks will be more than happy to play ball if they are confident that the loans can be taken over by IIFCL.

In the policy document on take-out financing the government has made it clear that IIFCL will take over the loan of projects that have residual debt tenor of at least six years or are yet to achieve financial closure. Most importantly, the finance ministry is of the view that projects in sectors like roads, railways, airports, seaports, urban transport, gas pipelines, SEZs, convention centres and tourism will all be eligible for take-out financing by IIFCL.

The new measure could be a direct fallout of the meetings between bank chiefs and the Reserve Bank of India for easing norms for infrastructure financing. When top bankers met up Reserve Bank of India deputy governor Subir Gokarn the top of the mind demand was the cut in savings bank rate which will help the banks improve their net interest margins. Union Bank of India chairman M.V. Nair, there is huge demand for funds from the infrastructure sector but exposure norms, pricing and ALM leave banks vulnerable.

The mismatch arises out of the fact that new deposits in the last few months have been of shorter maturities such as one year, but the infrastructure projects have tenures of 15-20 years. The idea which was floated by banks was to issue tax-free bonds with the caveat that the central bank will exempt such bonds from cash reserve ratio and statutory liquidity ratio. The conservative estimate made by the banking industry is that there will be about $550-billion investments required in the current Five Year Plan alone (2007-2012). This is where the idea of take-out financing by IIFCL came to the rescue by buying the loans from the banks at a latter date, though the banks will first extend loans to such projects. The picture is completed by the fact that the liquidity situation is expected to be easy this financial year and interest rates will remain soft. The undisbursed loans should start to flow from the next financial year and the banks have beseeched the RBI to not let any tightening that would lead to lowering liquidity in the system.

The banks are also faced with a situation where the interest on savings accounts will be calibrated on a daily basis, according to the latest RBI directions, which would increase their cost by 75 basis points. That would entail a reduction of savings rate to go down by 50 basis points so that banks can withstand the increasing cost.