In a candid interview, finance veteran Arun Purwar, Chairman of IndiaVenture Advisors Pvt Ltd & PHL Finance, suggests that since the bond market is deep enough to take care of funding requirements of infrastructure projects, the government must encourage infrastructure fund raising through the bonds. Although, it is at a nascent stage, the government agencies can learn from global experience.
The Project Monitoring Group headed by the Prime Minister recently cleared projects worth Rs 4.2 lakh crore. It´s a huge amount, but the question remains how will these projects see the light of day unless funded? Does India have strength to fund these projects?
You must understand that even though Rs 4.2 lakh crore worth projects have been cleared, it is not necessary or required that all the projects may witness funding at one go. The infrastructure projects, by nature, are spillovers from a certain period of time. For e.g, in a hydropower project, investment takes place for more than a decade; if we consider funding a thermal power project, it takes investment cycle of around two to five years; for road projects, for that matter, the approximate investment cycle takes five years.
So if the government has cleared Rs 4 lakh crore worth of projects with a target to get it commissioned at least in next seven to eight years, I am 100 per cent sure that annual fund requirement for these cleared projects will not go beyond Rs 50,000-70,000 crore. Ergo, with an economy of our size, where the total lending, including for infrastructure sector, is Rs 10 lakh crore, to fund mere Rs 70,000 crore annually will not be a big task for the government.
I would rather counter the argument on a note that India does have capacity to fund more than the given figure.
Meanwhile, the current government is leaving no stone unturned, making infrastructure sector a systematic sector to invest in. The way our Prime Minister is working on building bilateral relations with Japan, China and now USA, we can sense a different kind of global interest, which is building up currently towards India. A kind of positive sign, which we have been waiting for several years.
Going forward, if our government will be able to show positive movement to the global investment community that India has a potential to become an investment hub, not only the domestic funds will be available, but also the offshore funds will be available at ease.
Enough has been talked about land acquisition, forest clearances, displacement, compensation etc and measures have been taken to improve the scenario. If these issues can be resolved, then why not funding? Where should a project proponent go and knock the door to get funds?
I feel that we have been unable to follow the global examples. Forget about replicating them. There are various countries, which are half our size, which have managed to do well in terms of building world-class infrastructure projects, with the help of various funding options. Most of the developed countries are leveraging funding options available at a great extent. Unlike India, countries such as USA, China, Japan, Australia, United Kingdom and France are not completely reliant on banking institutions. That´s because, they have access to alternate funding options. Some of the countries have even established specialised institutions, which only fund infrastructure projects.
But in India too we have specialised funding agencies for the infrastructure sector…
Yes, we do have specialised agencies such as IDFC and IIFCL, which fund infrastructure projects. Today, what has happened is, banking systems can give support to infrastructure projects to the extent of 12 years, however, when compared to other countries, as soon as the government announces any project (s), it is the market which comes forward to fund it by way of corporate bonds, infrastructure bonds, municipal bonds and so on and so forth. So for me, in India, the bond market is first of all in the nascent stage or yet to develop. Interestingly, the bond market is deep enough to take care of funding requirements of infrastructure projects.
However, despite having the capacity and capability, as on today, the bond market in India cannot take care of entire infra funding, as the market has been marred with many issues, which has not allowed the bond market to flourish in the country. The government, along with the Securities and Exchange Board of India (SEBI) and Reserve Bank of India has to play a greater role to encourage the bond market in India.
So you mean to say, although RBI has relaxed norms on bond financing, it will not meet infrastructure funding needs?
Absolutely, it will not. Firstly, look at the huge amount of requirement of funds for the infrastructure sector. If anyone expects banking institutions to finance these requirements, they are making a big mistake. Banks are overexposed to the infrastructure sector, they cannot fund any more.
In a recent IBA conclave, some experts suggested that Indian financial regulators should implement sector-based models.
These models are an instant hit in countries like Australia, UK, France and USA. Why is India not inspired by such models?
Those who suggested implementation of sectoral model in India should understand that before getting inspired or trying to replicate it (sectoral based model) in the country, the government is required to study the same deeply and understand its implications and advantages. But the Indian funding agencies or experts need to look beyond replicating any model in India.
Has anyone thought why there are rising Non-Performing Assets (NPAs) in India?
Every funding agency was jumping on the bandwagon for funding projects without doing any groundwork. Consider this: many funding institutions have funded gas-based power projects, but now these projects are lying idle, the reason being no gas supply. Similarly, banks funded thermal power projects and now, these power projects are crying for coal supply which is not adequate at the moment. Reason, despite having rich resources available domestically, we have been unable to leverage them, and are dependent on imported resources. It does not make sense. So instead of replicating any model in India, the experts first come together and try to give positive suggestions on the priority issues that we are facing now. In fact, I would rather suggest that, instead of making any fresh investment, the government should revisit the stuck projects with greater clarity and try to invest in those itself.
Even the cancellation of coal blocks seems to be a setback for banks as it is expected that the NPA level may increase to the tune of Rs 80,000 crore…
The honorable Supreme Court took a view that the earlier government did not adhere to the norms while allotting coal blocks to the private players. But now, it is time for the current government to resolve this issue as many power plants in the country had raised a red flag as far as coal availability is concerned. The private sector should not suffer for the mistakes that the government had done earlier. Because, the private players had invested significant amount in the exploration of coal mines.
Today, the only hope that the country has is on our present Prime Minister Narendra Modi. The way he has concluded his foreign tours with signing of memorandums of understanding worth more than $70 billion, which may take some time to come into existence, but has at least given a ray of hope for domestic investors to start again their investment exercise in India on a large note.
Were you expecting a correction in RBI´s monetary policy, at least this time?
Forget about me, nobody was expecting any correction in the recent monetary policy presented by the RBI. Looking at the present inflation level, it does not give a comfort call to the RBI. RBI´s first priority is to fight with the current inflation level. At present, the physical inflation has complimented the monetary policy. However, now I expect that since the inflation level has been moderate, RBI in its upcoming monetary policy needs to make aggressive moves, due to which liquidity flow will be more in the market.
Despite having alternate source of funding such as takeout financing, IDFs, etc, why have these options not witnessed any success?
If you look at funds introduced by IDFC, they were successful. But one must look at the current condition of the market. It is yet to improve from its previous unmitigated disaster. The earlier government had come to a standstill. The government should understand that the infrastructure fundings are long-term fundings. A private player invests in a project for a period of 7 to15 years, but it takes another 13 to 14 years to pay off. Here, we lack in providing long-term funds to the sector. And these funds are payable to the private sector on demand. Private players cannot use short-term funds for long-term demand.
Asset-liability mismatch (ALM) has pushed major banks into a sea of NPAs.
Your comments.
India is currently facing huge ALM issues and therefore, I suggest that the infrastructure funding should be diversified as much as possible. The government must encourage corporate bonds, the gov¡ernment also must encourage and set up specialized institutions that can take care of infra fundings, and also encourage domestic as well as foreign fundings. But for foreign funding, the government must provide a conducive environment. For that, we should aggressively work with global agencies such as Asian Development Bank, International Finance Corporation, Japan International Cooperation Agency, World Bank, etc. Because for any bankable infrastructure projects, there will no dearth of finance.
Meanwhile, another source of funding, public deposits and pension funds, have not been utilised in the infrastructure sector as they need to be…
Saving deposits should not apply to infrastructure funding, however, it has been utilised in infrastructure sector but only to a certain limit. But it is a rather bad solution. Meanwhile, as far as utlising pension funds is concerned, it does have potential to strengthen the infra sector. However, again, it has not been fully utilised due to implications involved in it. Although we are tapping pension funds for funding the infrastructure sector, at present, they do not have deep pockets. That is why we have to depend on overseas pension funds.
Rahul Kamat
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