Financing infrastructure

Financing infrastructure
The Hindu Business Line, December 9, 2009, Page 8

--------------------------------------------------------------------------------
If the model of take-out finance catches on, banks may do for the core sector what the old consortium lending by IDBI, ICICI and IFCI did for industry.
--------------------------------------------------------------------------------

If the trend that is visible now among some large- sized banks catches on, the economy could witness a sea change in the financing of infrastructure with banks, for the first time, entering the core sector as a major source of funding. Canara Bank, for instance, has doubled its funding, while Vijaya Bank has registered a 20 per cent increase in its exposure. These banks are now in the company of those such as State Bank of India and Punjab National Bank which have expanded their lending to core projects. This is yet the tip of the iceberg for scheduled banks still prefer lending for short term requirements or against tangible collateral such as housing in order to match their assets and liabilities. This pattern could, however, change.

Contrary to the popular view, the catalyst for the greater play of bank funds in the core sector may not so much be the concept of ‘take-out' financing announced by the Finance Minister, Mr Pranab Mukherjee, in his July budget as the India Infrastructure Finance Company Ltd (IIFCL) now in its third year of operation. The special purpose vehicle launched a few years ago, in turn, will owe its success in large part to the specific policy aimed at drawing the private players into the core sector, a policy device that has acquired special urgency in view of both the terrible state of roads, electricity and even basic health, and the recognition that funds will be available once the environment is in place. In some measure, the setting is right; banks are now willing to step into a field they had shied away from even though take-out finance has enjoyed the Reserve Bank of India's blessing since 2000. Though the scheme was tweaked three years later to encourage banks to part with funds for long gestation projects, the outcome was desultory in large part because the economy was on song. Now with the confluence of various factors, most of all the government guaranteed IIFCL that will author the take-out finance model with banks, whereby it will accept 60 per cent of the exposure to core projects on its books after a pre-determined agreement, core sector lending may be in for a pleasant surprise. In the coming months if the IIFCL model for take-out finance enjoys popularity, banks may do for the core sector what the old consortium lending by IDBI, ICICI and IFCI did for industry.

Yet the success of the new pattern of funding rests on clearing the ground of further road blocks, the most obstructive being land acquisition. So far handled ineptly by the Centre and States, messy land transfers may drive away the most ardent financiers from this very critical sector.