By Ashish Kapur
Many improvement finance institutions (DFIs) given that Independence have failed due to inadequate concentrate on expense-successful liabilities and elevated building-dangers creating projects unbankable.
While a sustainable, low expense-liability profile is a DFI’s key challenge, banks with prepared access to retail liabilities face asset liability (ALM) mismatches in financing projects. Our inability to handle the threat ahead of a project reaches industrial operations date and incapability to structure bankable projects is the genuine challenge requiring a answer.
By postulating a new financing entity as the panacea for all our infrastructure woes, I am afraid we are only barking up the incorrect tree!
Commentators tom-toming the new DFI cite its low funding expense as a remedy for the low pace of infrastructure improvement. There are two basic difficulties with this argument.
Firstly, how low is actually low. The key funding supply for PSU banks are the existing and savings account (CASA) balances. Considering interest free of charge CA, 3% SB coupon, deposits across tenors and their percentage contribution, the typical expense of demand and time liabilities performs out to about 3.5%.
Agreed, banks have a 40% commitment to priority sector lending (PSL), 18% SLR and 3% CRR obligation. Doing a easy math, critics argue that out of each and every Rs one hundred raised, banks can lend/make income from only Rs 39 (one hundred-40-18-3). Alas! That’s unacceptable, given that effective banks undertake little ticket-size PSL financing for 40% book, at a profit.
While the precise liability profile of the proposed DFI is a moving target, some flaunt its potential to raise 50-year foreign capital from multilateral agencies at about 1% as a game-changer. Sure, extended tenor capital is welcome, but do not overlook currency hedging that increases landed funding expense to more than 5%!
Regarding fundraising through rupee bonds, what stops the government from asking SBI or sectoral DFIs to challenge more extended-term bonds with tax incentives? It is crucial to create a robust secondary bond market place. Given higher government borrowings and preference of Indian banks to hold G-Secs in the HTM segment, there’s hardly any trading, and capacity of banks to subscribe additional remains restricted.
The second trouble with the ‘low pace of infrastructure development’ argument is the absence of enough bankable infra-projects. The genuine challenge is not so a lot about financing per se, but the availability of bankable projects.
Bankable projects, for the sake of simplicity, can be defined right here as projects exactly where the humongous building-stage threat has been identified and structuring techniques for tackling it formulated. Managing operations-stage threat, like discoms reneging on PPAs or toll collections becoming arbitrarily stopped, demands a policy-/legal-certainty framework also.
How, then, to deal with this?
Tighten the regulatory framework, nodal sectoral institutions monitoring payment delays and co-ordinating with authorities for cutting approval red-tape and multilateral agencies for concessional financing of ventures can assistance make projects more bankable.
Leveraging financing capability of overseas export-credit agency of prosperous bidders is a easier answer rather than taking the full threat on the DFI’s books
Ingenious structuring by banks with the help of nodal sectoral institutions can help—for instance, to boost prospects of its PPP projects, NHAI could encourage bank funding by displaying flexibility/ mitigating threat. If NHAI guarantees fixed repayments to banks for funding timely completion by excellent developers possessing stressed balance-sheets, it could be a win-win for all. Developers make income, say, Rs 700 crore on project completion, the bank gives competitive 5-year financing with repayment threat on hugely-rated borrower and asset gets transferred, say, to NHAI, which then auctions the constructed TOT toll project to concessionaires for 30 years against upfront payment.
Believing the notion of straightforward DFI income availability becoming an elixir could potentially lead to a predicament of excellent income chasing poor income. Just as income alone can not invest in extended term happiness, mere extended tenor capital availability will not assure the improvement of planet-class infrastructure.
Certified treasury manager, credit and partnership banking veteran of BNP Paribas, FirstRand, Global Trust and L&T Infra Finance (LTFS)