In an exclusive interview, Luis-Miguel GutiTrrez, Office Director, KfW IPEX-Bank GmbH shares details on the bank´s growing interests in funding Indian infrastructure.
Recently, Germany has shown interest in investing in the $90 billion Delhi-Mumbai Industrial Corridor (DMIC). Do you see KfW IPEX-Bank having any role to play in this possible project?
Within the KfW Group, the promotional bank of the Federal Republic of Germany, we are the commercial banking arm and focus on international project and export finance. This project in particular is more of interest to our promotional arm of KfW Group, the KfW Development Bank. In that respect, certainly there is interest on the German side to promote the development of the industrial corridors. KfW Development Bank is using its contacts with the relevant authorities on the Indian side to closely monitor the situation, and report to our government. The government will ultima¡tely decide if and in what form KfW could provide support.
India has extremely strong bilateral trade relations with the EU (and Germany in particular). In what areas can KfW IPEX-Bank help in deepening this relationship?
Our focus from KfW IPEX-Bank GmbH lies in helping primarily Indian companies and projects to import goods and services from Europe or European companies. We hence enable the trade of goods and services between the two continents under trade and long term loans. Of course, we also strive to accompany European companies to set up manufacturing plants in India and thus contributing to the labour market. The same applies also the other way around. So far, we have also funded Indian corporate capital investments in Europe to extend their operations there.
You have had considerable exposure to India´s booming renewable energy industry. Now, with the government in its recent budget giving the much-needed push to the sector, do you see an increase in your exposure in future?
The targets of the Indian government for the addition of renewable energies are impressive. We have been looking at several projects for commercial financing from our side; however, KfW Development Bank has been more active in this space. KfW Development Bank is glad to offer its expertise from funding renewable energy projects all over the world when offering funding to State-owned entities like Mahagenco for building India´s largest PV plant or different entities for developing hydropower plants. In their cooperation with different public financial institutions like IREDA, REC and IIFCL they also support in offering more funding opportunities to private developers. At the same time, the Indian and State governments also have to further improve the framework conditions by enforcing the renewable purchase obligations, improving the trading of renewable energy certificates and ensuring that debt-ridden distribution companies timely pay the agreed upon tariffs for renewable energies.
Could you walk us through your outlook for the infrastructure sector?
I think the sentiments of business, financiers, investors and other stakeholders have improved dramatically over the last months. As such a lot of activity can be observed in the infrastructure space. What we are seeing is a revival and gradual turnaround of the activities in this sector. In that respect, I do not expect an immediate sharp rise in the number of projects, but rather a steady and moderate growth. Infrastructure projects have a long lead time even until they reach financial closure. Hence we still will need to wait until projects see the light of day.
If you ask me, in which sectors I would expect more activity, well, as you know the government has laid out the budget emphasis on public-private partnership projects for attracting investments in airports and seaports. Further, it set a target of 8,500 km for award of roads projects for the National Highways Authority of India (NHAI), just to name some.
Apart from that, I personally would expect quick wins and a higher dynamism in the oil & gas sector, particularly in liquefied natural gas (LNG) terminals and in the downstream segment as some of these projects here are already in an advanced planning stage.
How hopeful are you that infrastructure will see a turnaround?
The government and the Reserve Bank of India (RBI), have in the short time since the elections, already adopted certain measures to help infrastructure to take off. That is quite impressive. The proposals to relax CRR/SLR requirements for infrastructure bonds, and set up infrastructure investment trusts are certainly good steps in the right direction. Also, the so-called 5/25 financing scheme, although some uncertainties persist in that matter, should help project realisation.
More importantly some of the fundamental issues are also observed. Now, these cannot be solved overnight. This relates to issues such as legal frameworks or the adequate allocation of risks between the equity and debt. I believe policymakers are well aware of these points and I am hopeful that we will also see good progress in that fundamental area over the next years, helping more infrastructure projects to pick up.
What kind of enthusiasm are you seeing, after the new government has taken over, on part of banks to lend to the infrastructure segment? We have seen a lot of banks shying away from lending to infra projects in this kind of an environment.
I think the enthusiasm is still there but banks have become more prudent in their approach. In times of rising non-performing assets (NPAs) and those coming predominantly from the infra space, I believe that banks now take a more risk-averse approach and conduct more extensive analysis. At the same time, I think that the appetite for infrastructure financing is still there. What you need is to get the administrative and business framework right. Funds will then follow.
As to us, we had always a long-term view on financing infrastructure projects. We have been financing projects across various industries, most of them covered by a European Export Credit Agency. These offer certain benefits to infrastructure projects.
Can you outline the benefits of ECA financings for infrastructure projects in India? What kind of role is ECA financing likely to play in the coming years in India?
See, from a macro perspective, funding requirements in infrastructure projects are huge. There is no alter¡native as to also tap foreign debt sources. However, these are often lien to provide tied financings along a cover from an Export Credit Agency (ECA). Further infrastructure projects require long-term financing. ECA-covered financing for infrastructure projects open an attractive alley to obtain funding during the construction phase and long-term financing thereafter.
From a microeconomic or business perspective, ECA-backed financings offer further benefits. ECA-covered buyer´s credits offer from a borrower´s point of view several benefits other than simply the diversification of funding possibilities. In India we have seen a strong appetite for financing along with financial supported interest rate schemes under the ECA buyer´s credits.
What are these supported interest rate schemes?
The Arrangement for Officially Supported Export regulates the Commercial Interest Rate (CIRR) from which an ECA loan can benefit. In fact these CIRR loans are fixed interest rate loans. The borrower therefore does not carry any interest risk for the tenor of the loan. Due to the financial support element, they further come along at attractive long term rates which are publicly available and transparent. These types of loans can make a lot of sense, especially to borrowers with a natural hedge, on an all-in cost basis taking into account the insurance premium for the ECA.
Would this also be applicable for complex structures?
For more complex infrastructure projects, ECA buyer´s credits can be construed as shopping lines or multi-cover structures where several supplies could be bundled and therefore maximising the overall allocation towards an ECA financing. We have been doing this quite successfully over the last years. The point is, you require a partner bank that is experienced enough with the various ECAs and schemes. So far KfW IPEX-Bank GmbH has a sound track record in structuring and arranging these schemes. In India we have arranged for example a single $2 billion shopping line for one of our clients. Under this facility the client could purchase necessary equipment from more than 40 suppliers from Germany linked to one of his expansion projects. This shopping line also encompasses a CIRR tranche. Other clients have benefitted from our good understanding and linkage with European ECAs so that we arranged multi-ECA structures, where ECAs cover in parallel or reinsure partly one other for a single project.
A more pragmatic alternative towards the typical ECA covered buyer´s credit are the ECA-covered on-lending structures or ¨2-Step Loans¨. Such structures allow for a relative fast financial close as international banks typically already have framework agreements in place with most of the relevant domestic lenders. As the project risk remains with the fronting bank, these structures give banks with comparatively low sectors knowhow, the comfort to participate in an infrastructure project which they would otherwise not have been entered into whereas the project itself benefits still from an ECA covered loan.
Would the benefit for ECA financing only be linked to complex projects where you have sourcings from various countries?
No, not necessarily. Of course buyer´s credit with only one ECA can also be of interest to a project. In fact that is the common case. The important thing to know is that each ECA has its own peculiarities, borrowers need to assess which financier can not only offer the most attractive financing conditions but would also bring in enough expertise assuring a smooth and efficient approval process for availing the ECA cover and ultimately assuring a timely financial close.
According to you, which sector do you find the most difficult to finance in India and why? What are the glitches in such sectors? And how can India overcome such glitches?
In India equally as well as in other countries around the world every infrastructure sector has its own glitches and particularities. It is hard to assess which is better off. Most of them share issues on the land acquisition and environmental clearances. Further down the road, you have sector-specific issues such as availability of input factors such as gas or coal challenges regarding the credit worthiness from the off take. Other sectors suffer from unfavourable tariff regimes. The art is therefore to structure deals according to the specific needs of each project and sector. You may call that tailor-made financing.
Apart from providing loans, what is the value-addition that KfW IPEX-Bank gives to its customers?
I believe that apart from being able to provide long-term financing to the Indian infrastructure sector, we have always taken a long-term view. This means that our customers benefit from a stable and reliable banking partner. Beyond that, we strive to understand our clients and the respective sectors. This means that we are organised by dedicated sector teams who are specialising on singular market sectors as we believe that this is how we can cater to our clients best. Although some basic structures obviously remain the same, understanding the particularities of a particular industry sector makes the qualitative difference to our clients.
We are witnessing a liquidity crunch in the financial sector. Is KfW´s strategy changing towards India in the changing economy?
No, not at all. We have a long term view on India and I think our history is proof enough. So far we have been financing projects and exports out of Europe for approximately 60 years, which makes us the original among the export banks. This holds true even for India where our first financings of European equipment dates back to 1965.
A part from that, on the infrastructure financings with its long gestation periods, I would not fully endorse that we are facing a liquidity crunch.
In general, I would say that banks are still looking to allocate their assets. This means that we are seeing a run towards the good credit risks. This holds true not only from the domestic banks but also foreign banks. Many of them are back after the financial crisis and are also coming back into India. I think the current policy announcement such as the infra bonds will lead to a further relaxation of liquidity. Good projects will always find enough banks. It is the other layer of projects which are struggling to find funding.
Are you still optimistic about India´s growth story and confident over not shying away from funding it?
Yes, absolutely, and I do not see any reason to shy away from India. To the contrary - signs for a gradual recovery are eminent. Indicators such as GDP growth, inflation, currency are all positive. Maybe we see some up and downs over the next months but the trend will be positive and growth-oriented.
Of course we need to be realistic. We cannot expect getting back to nearly double-digit GDP numbers in the short term but I am convinced that we will see a gradual and steady recovery of the economy. The country and the people of India are wonderful, I am happy to be here!
- Rahul Kamat