If India?s infrastructure build-out has to happen at the desired pace, then the suggestions in the Deepak Parekh Committee Report need to be heeded. The committee has recommended that all foreign insurance and pension funds be allowed to invest in the debt market and also that a Rs 50,000-crore debt fund be set up. Otherwise, it is going to be hard to cobble together the one trillion dollars or so that will be required to build all the power plants, highways and ports that are being planned. Already, as Parekh himself has pointed out, if all the projects planned for the 11th Plan period are to take off, there will be a shortage of Rs 2,00,000 crore.
There is no rocket science to the fact that institutions with long-term liabilities like pension funds and insurance funds are most suited to finance long-gestation infrastructure projects. So far, in India, it is the banks that have borne the brunt of infrastructure financing. In the five years leading up to 2008-09, lending to the infrastructure space clocked an annual growth of 48.6%; scheduled commercial banks? outstandings to the infrastructure sector grew 31.6% in 2008-09 to around Rs 2,700 billion over the previous year. Without doubt, the number should have been significantly higher for 2009-10 and so there?s not too much headroom left, given that some of the projects are becoming increasingly vulnerable to asset-liability mismatches. For sure, the business will become slightly more attractive for banks if they are allowed to float non-SLR infrastructure bonds, but the mismatch in the profiles, of money borrowed and lent, won?t go away. Also, one is not clear whether there will be too many takers for these long-term bonds, unless there is a vibrant debt market.
In any case, there is only so much that banks can lend to one space without crowding out other borrowers and distorting their loan books. Indeed, the PM had made the point that India?s infrastructure sector needed access to long-term finance facilitated by a robust domestic debt market. So far, viable projects have managed to mop up money and since projects are inevitably delayed, the shortage hasn?t been felt. In addition, we need a fund like the one Parekh and his team are talking about. He says the idea of the new fund is to eliminate risk by funding the projects after the assets start earning, either through toll from roads or user charges from airports.
During the construction period, it is the banks that will lend to the projects. In other words, the fund will be engaging in take-out financing by lending to the projects, after cash flows start coming in. Since the cash flows will be channelled into an escrow account, contributors to the fund cannot have too much of an issue. Judging by flows into equity markets and FDI, foreign investors seem to like India. So the corpus of Rs 50,000 crore should not be hard to collect. However, it would seem that banks are going to remain overexposed to the infrastructure space, though their ALM problem will be solved.
There have been some concerns with regard to take-out financing, especially of the guaranteed variety. Borrowers would be looking to negotiate a lower interest rate with their new lenders since the risks would have come down. Moreover, they would be hoping that the conditions laid down by lenders would not be too stringent. For instance, while banks allow the promoters of the project to sell a stake after a certain time period, the new lenders may choose to increase the lock-in period. But there is nothing really unfair about this and this should be a non-negotiable if borrowers really want the money. IIFCL has been allowed to kick off take-out financing with a ?running cap? of Rs 25,000 crore, but the more funds we have, the merrier. We also need to be able to tap household savings, a minuscule share of which is currently in financial products, for infrastructure spends. A few months ago the FM announced that the government would give retail investors tax sops if they bought infrastructure bonds up to a limit of Rs 20,000, in addition to the tax benefits that they are getting for an amount of up to Rs 1,00,000. While all infrastructure firms and NBFCs may not be able to pick up money, the more established ones and those backed by the government may be able to mop up good amounts. Of course, if they?re looking for very long-term money, say, for a tenure of 10 years or so, the interest rate offered will have to be really attractive. Otherwise investors won?t bite, given that the bond will be illiquid compared with a fixed deposit.
This brings us to the subject of a vibrant corporate debt market, something that we have been looking forward to for years but has remained elusive. If companies and individuals could be sure that they could sell the infrastructure bonds as and when they wanted, money would pour in. In the absence of a deep and liquid bond market, channelling household savings into long-term bonds could be a challenge.
shobhana.subramanian@expressindia.com