Pooling cash flow

The concept of pooled financing comes at a time when the industry needs it more than ever in recent history.

Clearing nearly Rs 2 lakh crore (still a small fraction of the pending part of the pie) was the first step for the Cabinet Committee for Investments and the special committee set up by the Prime Minister's Office for this express purpose. The real task remains in their execution, and funding options are not rosy any longer, as the reluctance among banks to lend to infrastructure is 'going viral'. CMDs of various nationalised banks have recently told this publication that they are shifting focus to retail and small-industry lending as too much money is already stuck in infrastructure projects. Many nationalised banks have expressed reservations about lending even to the roads and power sectors, hitherto considered star performers. Of course, private players seldom rule any opportunity out, so the response from private banks has been less sombre.

While non-banking financial institutions including IIFCL, PFC, IFCI, NBCC, IL&FS, Srei, L&T and others are only a handful in number and therefore limitations of lending values to the capital-intensive industry, banks have asset-liability mismatches and tenure problems to contend with.

One of the many hurdles that infrastructure borrowers are up against is that term finance is project-specific. While banks have (self-set) ceilings on group lending, and consider group's financial strengths overall while advancing the loans, individual project performance decides whether the loan will result in a healthy return or go down the non-performing assets (NPA) path.

CLP India, subsidiary of the Hong Kong listed power major, recently announced its 'pooled finance' strategy that includes financing from IDBI, IDFC and Standard Chartered, which have formed a post-lending consortium for the company's various wind energy projects to be pooled, so that there is greater flexibility in managing the project portfolio under the company. More assets will be added as they fructify, i.e., reach the commercial operation date (COD). The lenders and the company both seem pleased with the concept, since at least in theory it protects both the borrower and the lender. Banks are viewing this as a form of de-risking projects. Better cash flow management between projects can help those that haven't made enough money yet, and can take advantage of those that have. Documentation, too, has been standardised.

Pooled finance is not a novel concept it has been applied to bonds by grouping together assets but tweaked for infrastructure and for cash flow, it is novel. It makes immense sense, albeit

with limitations: The approach would work for overall cash-positive groups of projects; it will work best for post-COD projects since banks would like to protect their interests by ensuring there is cash flow before a pooling arrangement, so that loss-making projects don't simply piggy-back on their richer cousins.

CLP expects that financial closure for future projects will be quicker as a result of pooled finance, and it makes logical sense that it should. As banks gear up to tighten their purses on the infrastructure sector, innovative methods of financing are emerging. Like the dreaded middle-order collapse in the Indian cricket team, the infrastructure industry suddenly finds itself gasping for breath this year. Like unexpected brilliance from a newcomer, nothing could be better news for the industry than financing innovations.