While the government and the RBI have eased norms and pushed for financing opportunities, actual benefits will take time to trickle down, says Vishwas Udgirkar, Senior Director, Deloitte India.
What are the major issues surrounding infrastructure financing in India?
Infrastructure financing in India is surrounded by different types of issues including not-so-strong institutional & regulatory framework, weak investor´s confidence and to a large extent political instability till very recently. The government has recently allowed 100 per cent FDI in railway infrastructure but the same is not allowed in railway operations. Similarly, banks can raise infrastructure bonds for long-term funding but the RBI has imposed a restriction on Indian banks on buying new issues of infrastructure bonds. The new financing avenues are opening of late but the maturity level is going to take some time. Apprehensions may be right to some extent, on investment from pension and insurance funds also restricting fund flow to a large extent. Apart from debt financing, equity inflow from international developers also needs be strengthened to enhance the fund base by creating positive business environment, developing strong institutional and regulatory framework and imbibing these aspects in the concession agreement framework itself while conceptualising the projects for the infrastructure sector.
Why hasn´t infra finance taken off in India?
Infrastructure financing needs be dealt differently from normal financing which we are realizing of late. As we are already aware that the sector requires long-term financing, established framework for take-out financing and differential treatment in terms of CRR requirements etc., to enhance the fund flow. The funding avenues are being explored at present and certain sources like pension and insurance funds have their own restriction in entering this segment.
With multiple options available for financing infrastructure, why is the burden of providing infra finance restricted to only banks as the preferred choice?
As indicated above, the options are being explored from various sources in the country with a so-called weak regulatory and institutional framework as of now.
The maturity level would take some time and till then the burden is likely to continue with banks. Indian debt markets are still underdeveloped and raising funds in large scale for infrastructure projects is tough. The recent government efforts to encourage banks to raise funds for infrastructure via bonds has proved to be unsuccessful with the markets providing a lukewarm response. The concession agreement needs to be designed to adopt more avenues, i.e., take-out financing, of financing at the project conceptualisation stage to develop the financing market.
What can be done to make financing for the infrastructure sector viable?
Steps are being taken to strengthen infrastructure financing in India. The overall Public Private Partnership framework needs be strengthened to aim more equity participation from overseas apart from developing matured framework and instruments for long term funding sources like pension and insurance funds. These instruments need to be customised to the sector requirements with the gamut of infrastructure sector as well since the funding requirements and pay-backs are different in roads and highways from those in power sector projects. Similarly, Non-banking Financial Companies (NBFCs)-Infrastructure Finance Companies (IFCs) may be permitted to access external commercial borrowing (ECB) on liberal terms to make them globally competitive.
Most of the experts are of the view that if the government gives full autonomy to the PSBs while raising capital, the whole issue of financing infra will be eradicated. Is it a feasible option? What are the pros and cons in it?
There can´t be one ready-made solution for this issue. The need is to develop customised instruments for lending in infrastructure. The instruments need to be designed in such a way that these meet the RBI regulations. The public sector banks are regulated by RBI norms and the RBI has a larger responsibility of regulating overall economy which contain multiple sectors. The PSBs need to operate within the overall economic framework and regulations and develop new funding options and instruments for the sector.
Countries like the US, Hong Kong, Australia, the UK and France had tried to come out with sector-based financial models that have tasted mixed success. Would you suggest a sector-based financial model especially for the infra sector?
The quantum of risk may vary from sector to sector. Though most of the infrastructure sectors require large quantum of funds for a longer term, there can be separate funds for large sectors like roads and highways, ports, power. There is no straight solution in favour or against the sector-based financial model. The need is to test this on a pilot basis and gradually strengthen the strategy.
What strategies should a financial institution adopt to evade NPAs?
To prevent NPAs, financial institutions need to focus on improving lending practices by strengthening and restructuring the project appraisal process. A prospective approach needs to be adopted by the institutions in infrastructure sector lending. A strong take-out financing framework is also needed to enhance credit worthiness in the sector and reducing repayment risk.
- Garima Pant