Banks, FIs and large NBFCs play a vital role in infrastructure financing. But
they are likely to face severe resource constraint. Going forward financing
infrastructure is going to be a big challenge for the banking sector as
projects require huge amount of funds and these Financial Institutions, Banks
are restricted in a sense to maintain their asset-liability mismatch. These
alternate sources of Finance will also need to hone their skills in appraisal
and management of risks inherent in infrastructure lending. Financing of
long-gestation infrastructure projects has long been a ticklish issue for
project promoters as well as financial institutions.
Renowned banker Mr.
Deepak Parekh has given various recommendations to Government of India for
enhancing participation of Banks, Financial Institutions and large NBFCs in
Infrastructure Financing. He made a two way approach to manage both Asset and
Liability side and gave various measures to help the sources of Finance,
participate in Infrastructure.
Under Asset side
management, recommendation are for Securitization of Loans as it helps
transform loans to tradable debt securities, and thereby facilitates financial
institutions to not only address the exposure norm constraints, but also
distribute risks more efficiently even among those who do not have the skills
to appraise them. Further, he gave important recommendations regarding Rationalization
of existing exposure norms of Financial Intermediaries. This can be done by
relaxing the exposure requirements if intermediary can sell off the exposure in
short interval of time, say 6 months. Take out financing for infrastructure
projects, at present, conditional take out financing is subject to 100
percent risk weight for provision of capital by both the entities involved simultaneously
(with the take-out financier using a credit conversion factor of 50% till the
take-out happens), which results in i) maintenance of excess capital, thereby
restricting take-out financier’s lending ability and ii) increase in the
lending costs.
Under Liability
side management of these Alternate Financial Institutions, he made points
to enable banks/NBFCs to mobilize sufficient resources of suitable tenor and
nature for infrastructure financing. Recommendations were made to allow
financial intermediaries such as banks, financial institutions and NBFCs to raise
foreign currency borrowings for on-lending to infrastructure sector. There is a dearth of long term resources in the domestic market, but not
so in the international market. Since it is difficult for infrastructure companies
to directly access foreign markets in view of the projects being sub-investment
grade, inter-mediation of foreign funds by domestic financial intermediaries is
imperative. Other recommendation was that the resources, whether domestic or
foreign, raised by banks for a long tenor (say at least 10 years) by way of
bonds/term deposits for investment in infrastructure assets should have no
SLR requirement. This will reduce the cost of inter-mediation for
infrastructure and hence, induce banks to have a relatively larger exposure to infrastructure
than other sectors. In addition, this will encourage banks to use long term
funds for long term lending. Further Banks should be allowed to raise long
tenor gold deposits which will beused for the purpose of infrastructure
financing.
What are Infrastructure Debt Funds:
Watch out Mr. Deepakh Parekh talking about these Infrastructure Debt Funds; Asset Liability mismatch for Banks:
Part 1
Part 2
The complexity of the investments and their long duration will require the creation
of innovative instruments which spread out the risk judiciously among many
participants. It is this ability to design instruments best suited to the risk
profile of projects and then to allocate the risks to those best able to assume
them that will determine the extent to which the specific issues in
infrastructure financing will be addressed.
In the absence of specially designed instruments, these characteristics would
preclude the effective participation of the banks which typically have a
shorter time preference owing to their liability profiles. Further, as long as
necessary appraisal skills and detailed knowledge of functioning of
infrastructure markets are being developed, many banks may not be willing to
participate in infrastructure financing. In this regard, Government and Reserve
Bank of India are taking a number of steps. The Finance Minister, in his
budget speech for 2011-12, had announced setting up of IDFs to accelerate and
enhance the flow of long term debt in infrastructure projects for funding the
government's ambitious programmes in the sector. Recently, he
Reserve Bank today announced guidelines for permitting banks and Non Banking
Financial Companies (NBFCs) to set up Infrastructure Debt Funds (IDFs), to help
meet long-term financing for the sector. IDFs would be set up either as Mutual
Funds (MFs) or NBFCs
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