Takeout financing may soon kick off in India with the government deciding that the India Infrastructure Finance Company (IIFCL) can start the business with a ?running cap? of Rs 25,000 crore. That seems a rather small amount, seen in the context of the spend of $500 billion in the 11th Plan period, and also given that the country is looking for some $1 trillion during the 12th Plan period (2012-17). But it?s a start. And it will certainly help banks that are slowly becoming vulnerable to some serious asset-liability mismatches.
In the last couple of years, banks have become the biggest lenders to infrastructure projects. Scheduled commercial banks? outstandings to the infrastructure sector grew 31.6% in 2008-09 to around Rs 2,700 billion over the previous year. This is actually higher than the overall growth in outstanding credit, that year, of just under 22%. Even before that, they were lending fairly furiously; banks? outstandings to the infrastructure sector has clocked an annual growth of 48.6% over the last five financial years, albeit on a small base. Even smaller banks that didn?t really have the skills to assess the risks joined the party through loan syndications, in the process somewhat mitigating the credit risk for the others.
Ironically, life insurance companies, which have access to long-term money and should be the ones investing in the space, seem to be less keen on it. They put down much less money in 2007-08, about Rs 104 billion; in 2006-07 they had put in nearly three times that amount (Rs 289 billion), according to data from IRDA. That they are averse to taking on project risk is evident. They prefer instead the safer route of subscribing to debt paper issued by established companies and are, therefore, big buyers of non-convertible debentures.
It?s also true that infrastructure financing from overseas hasn?t been easy to come by since the global financial crisis broke out; RBI data shows that ECBs raised by infrastructure companies declined by 41% from $12.35 billion between August 2007 and March 2008 to $7.18 billion between August 2008 and March 2009. So, essentially it?s been banks that are funding projects; flush with money in 2009-10, they have lent large sums to power projects.
That?s why some relief in the form of takeout financing will help them; they can lend to the concerned project for three to four years, or any time period that they?re comfortable with, after which they can hand over the loan to IIFCL. It?s also good news for the borrower who would typically be able to negotiate the loan at a slightly lower rate of interest from the bank since the tenure would be shorter. Of course, most loans these days are negotiated at a floating interest rate and with fairly short reset periods.
However, there could be some challenges. Takeout financing will come at a price since the secondary lender (in this case, IIFCL) is taking on the same credit risk as the bank, even though it may not be putting down the capital on day one. Trying to read the funding environment six or seven years down the road, when the asset will come on its books, can be a tricky proposition and clearly this risk will have to be built into the price of the product.
That means IIFCL could lend at a rate that?s higher than the rate at which the bank lends in the initial stages. And the borrower, of course, will have to pencil this higher cost of money into his project cost. If IIFCL?s money is expensive, the project might not be viable. Power projects, in particular, are very sensitive to rising interest rates; even a one percentage point increase in interest rates impacts the IRR and could hurt projects that are being implemented with a 14% kind of IRR. Borrowers will also be apprehensive about whether IIFCL will change the rules once it takes over the loan, making them stricter. For instance, while banks allow the promoters of the project to sell a stake after a certain time period, IIFCL may choose to increase the lock-in period. There?s nothing really unfair about that though and should be non-negotiable if borrowers really want the money.
At the risk of repetition, India desperately needs a vibrant long-term debt market. Just take a look at the total FII investment in the debt market?it?s crossed Rs 20,000 crore (Rs 200 billion) in the first three months of the year, a four-fold increase over last year. But most of this is in paper of shorter maturities because no one?s willing to bet for the longer term. This could change if the bond market were deeper. Again, while few people today would be willing to put their savings into tax-free bonds of private sector infrastructure companies, except into firms run by the Tatas or Birlas or a couple of other trusted names, they might have taken a chance if they?d been sure they could sell these bonds just as easily as they can sell stocks. Without an active bond market, channelling savings into high-risk, long gestation projects will be difficult.
?shobhana.subramanian@expressindia.com