Infrascape 2012 | Finance: Brewing strain on debt servicing

SK Goel, Chairman and MD, IIFCL
 
For us the most active and fruitful sectors in 2011 were road and power sector. These sectors com­prise a majority of our port­folio. I understand that even in case of commercial banks these two sectors form the majority of their infrastru­cture loan book, if we exclude telecom as it is not eligible for financing by IIFCL.

Positive expectations: In 2012, I expect positive changes domestically. Large investments in infrastructure sector are projected for the 12th Plan, which starts in 2012. I expect the demand for funds to increase starting next year. The power sector saw some temporary pro­blems in 2011 mainly on account of fuel linkage prob­lems; I expect these problems to be ironed out in 2012. One more recent phenomenon seen especially in road sector PPP projects is aggressive bidding which is indu­cing more competition in this sector and reduce the VGF and other government support. I expect this trend to continue and expect aggressive bidding would induce more competition in other sectors too. I anticipate mod­eration in interest rates – this means newly con­ceived projects may become viable.

Competition: Reduced margins due to increased co­mpetition are expected on account of:

1. RBI has recently liberalised the ECB policy, includ­ing relaxation in all cost ceilings, replacement of existing rupee debt, etc. This would increase comp­etition for the domestic INR financiers.
2. The rupee may have hit the bottom against the USD in this cycle and is not expected to depreciate further. This would motivate raising ECB, as the actual burden for ECB loan servicing shall be much lower as the rupee appreciates.
3. The new framework for IDFs with incentives like tax incentives, reduced risk weights, increased exposure norms, reduced withholding tax etc, will enable IDFs to provide finance at lower costs.

Challenge: For many projects, interest rates have gone up from 10-11 per cent to 13-14 per cent, increasing the strain on debt servicing. This makes it difficult for the infrastructure projects' sustainability. Most of the projects have annual reset and this would lock in high interest for such projects for at least one year.