¨Bond market will see a face-lift in the near term¨

In an exclusive interview, Rajiv Lall, Chairman, IDFC says that the infrastructure sector is a complex industry and infra funding is an even more complex activity.

Why are alternative financing modes unable to speed up despite higher demand?
I agree that that these alternate modes of finance are needed to see some momentum but modes such as infrastructure debt funds or take-out finance are alone not going to solve any infrastructure finance issue. It is expected that the new regulations by the Reserve Bank of India like bond financing norms, 5/25 refinancing norms, etc., will hopefully brings some positive signs for infra funding. Under the 5/25 structure, a bank may fix longer amortisation period for loans to projects in infrastructure and core industries sectors, say 25 years, with periodic refinancing, say every five years.

The objective of these instructions is to mitigate the Asset-Liability Management (ALM) problems faced by banks in extending project loans to infrastructure and core industries sectors, and also to ease the raising of long term resources for project loans to infrastructure and affordable housing sectors. This will also lead non-banking institutions to fund infrastructure as they may not face ALM.

And, with exemption of long-term bonds from the mandatory regulatory norms such as the Cash Reserve Ratio (CRR), the Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL), if the money raised is used for funding of infra projects, the bond markets will become even deeper as the banks themselves will be issuers for long term takers.

The whole purpose of setting up IDFC was to exclusively fund infrastructure. Now with your becoming a bank, will your focus on infrastructure itself come down, will it suffer?
I don´t think it will suffer. But in relative terms it will be less. Just because IDFC was set up to do only infrastructure, that does not necessarily mean that this would be true for eternity. I think what the reality of the experience has taught us is that a mono-line financial services business in a country as complex as ours and subject to so much regulatory risk, is a dangerous thing to build from a risk management perspective. In financial services, diversification is critical to long term stability and sustainability and, therefore, the logic for a bank is incontrovertible.

Right now, the major concern for any bank is rising non-performing assets. IDFC has recently received the banking license. How are you strategically placed to evade NPAs?
In this case, we will not lend where too much of risk occurs. The strategy is, IDFC will not lend to any infrastructure project where the risk level is high. If most of the banks are forced to revised their lending strategy because of their earlier funding mismatch, in that case, even we have to think on the same lines since we are a new entrant in the banking space.

So does that mean the banks, mainly PSUs, were unable to do their mathe¡matics correct?
It´s rather a harsh question and an unfair to even comment that the PSU banks have not done their mathematics correct while funding infrastructure projects. The infrastructure sector is a complex industry and funding is even more complex due to implications involved in the sector. The infrastructure sector is such a industry where future risks cannot be gauged. But this was earlier, when the sector was flooded with aggressive biddings and a number of projects. But now, all the banks (are) assessing their ¨factual errors¨, (and) are strategising their fundings while lending to the infrastructure sector.

But the earlier finance minister had blamed all the banks for rising NPAs. The ministry has held them responsible for this situation…
It is unfair to blame banks. In my earlier answer, I had already explained it. And it is also unfair to say that the banks are not responsible for rising NPAs. The point is, we bankers know the situation better than anyone today and our collective goal is how to move forward which will take everyone out of this mess.

Recently, the Project Monitoring Group (PMG) has cleared Rs 4 lakh crore worth of projects. Most of these projects are new in nature. How are banks going to facilitate the requirement?
Unless the public sector banks are capitalised quickly by the government, we will not have the strength of the financial system balancing the defined growth. I have been arguing sometime that today´s requirement is to infuse public sector banks with more capital which will enable them to bring higher liquidity into the market and much-needed availability of funds to the infrastructure sector.

– Rahul Kamat