Infrastructure holds potential for banks

Infrastructure holds potential for banks
The Hindu Business Line, December 7, 2009, Page 10

Anjana Chandramouly, Bangalore

Many large-sized banks have grown their exposure to infrastructure lending in the past few months, and if the recent push for infrastructure by the Government is any indication, the pie could only get bigger for them.

“The infrastructure sector holds a lot of potential for banks, with lending opportunities of $130-140 billion,” Mr H.S. Upendra Kamath, Executive Director, Canara Bank, told Business Line.

Several factors can work in favour of banks in this regard. Commercial banks are being allowed to take exposure in infrastructure projects where India Infrastructure Finance Company Ltd (IIFCL) or Infrastructure Development Finance Company (IDFC) are leading financers. The Reserve Bank of India has also taken a liberal view on the risk weightage of those projects where take-out financing has been organised.

The Government's decision to open up development of toll roads, airports, ports etc. to the private sector, “is driving up investment,” said Mr Albert Tauro, Chairman and Managing Director, Vijaya Bank.

Canara Bank recorded a 59-per cent year-on-year growth in infrastructure lending during the second quarter of this fiscal, while Vijaya Bank saw about 21 per cent year-on-year growth in infrastructure credit during the second quarter this year. “There will be a 15-20 per cent growth on a sustained basis in this space going forward,” said Mr Tauro.

The increased focus on infrastructure will continue for the next six months to a year, said Mr Ashvin Parekh, Partner and National Leader – Global Financial Services, Ernst & Young.

“While larger banks such as State Bank of India, Punjab National Bank, Bank of India and Canara Bank have grown their exposure in infrastructure lending, smaller banks are still keeping away,” he added. Larger banks are willing to participate in projects where the regulatory risks are lower, said Mr Parekh.

However, banks may face some difficulties, especially in long-tenored funding in the infrastructure space. For instance, projects such as roads are not preferred because their tenor is long, while funding for ports is preferred as the turnaround time is much less, he added.

Refinance rates

There is an absolute need to create an alternative source of funding by the government, said Mr Kamath of Canara Bank, adding that for commercial banks to play a bigger role, “there is a need to have a refinance window for infrastructural lending and an efficient mechanism of take-out financing.” Refinance at affordable rates should be made available to banks, he said.

“With more and more take-out finance partners coming in, the ability on the part of the banking companies to invest in infrastructure projects is extended. Banks have indicated that they can hold out an investment for a period of about five years in projects where take-out finance has been organised,” said Mr Parekh.