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Vinson Kurian

Thiruvananthapuram , Dec. 15

JUST as a banker is bound by duty to ensure financial viability and bankability of any investment activity that he chooses to provide finance for, the same caveats would apply in financing investments in agricultural and allied activities, too.

An investment, which is financially viable, need not necessarily be bankable. Similarly, an investment, which is bankable, need not necessarily be financially viable.

Hence it is necessary for a banker to have a clear understanding of the concepts of financial viability and bankability, according to Mr Samuel John, who retired as a top-ranking Reserve Bank official, having put in 25 years in agricultural/rural banking and development. Mr John also worked as the Principal of the Pune-based College of Agricultural Banking of the RBI.

An investment is considered to be financially viable if it gives an average rate of return to capital during the entire economic life of the asset, which is not less than the specific minimum rate fixed. For working out the average rate of return to capital, the discounted cash flow method is used. Therefore, an investment is considered to be financially viable if the internal rate of return (IRR) is not less than the specific minimum rate fixed.

In developing countries, the minimum rate of return fixed varies generally between 8 per cent and 15 per cent per annum. The minimum rate of return expected is related to the opportunity cost of capital.

In respect of financial viability, the inter-relationship is between the capital cost (irrespective of the source of finance of the capital) and the net incremental income arising out of the investment. Therefore, subsidy given for an investment will not affect financial viability of the investment.

An investment is considered to be bankable if the loan amount given for acquiring an investment activity can be recovered within the economic life of the asset and within the maximum period permissible by the bank, from out of the repaying capacity arising out of the incremental income.

Thus for an investment to be bankable, the repayment should come within the economic life of the asset.

If repayment cannot be made within the life of the asset, the investment is not bankable.

Further, the repayment should come within the maximum period permissible by the banks, which is normally 15 years.

In other words, for an investment to be bankable, the loan amount given by the bank should be capable of being recovered within the economic life of the asset created out of the investment, but not exceeding 15 years.

Another condition for an investment to be considered as bankable is that the loan amount given for acquiring the investment should be capable of recovery out of the repaying capacity arising out of the incremental income. In other words, repayment should come only out of the increased income or incremental income from the investment. Further, only that portion of the incremental income, which is called repaying capacity, should be taken into account for the purpose of repaying the loan.

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