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C. Shivkumar

Infrastructure thrust may lead to asset-liability mismatch

Bangalore , Dec. 7

With the shift in focus to infrastructure lending, banks have begun discussions with infrastructure financing institutions for take-out financing.

Bankers said that take-out financing arrangements were necessary to avert asset-liability mismatches. While infrastructure and project financing have long gestations period with maturity profiles in excess of 10 years, deposit accretions among banks were of shorter durations, with tenors confined to three years. Deposit accretions taking place in recent times have mostly been with maturities of about one year.

Although deposit growth had accelerated to about 22 per cent on a year-on-year basis, long-term deposit accretions have considerably slowed and were being disintermediated into unit-linked insurance funds, equity markets or mutual funds, where returns were considerably higher. Short-term deposits, including term deposits of under one-year, comprised about 55 per cent of the aggregate deposits, bankers said.

The interest rates on these funds in a tight liquidity condition were in excess of 7 per cent, even for short durations. Despite the low-cost of saving bank deposits (of just 3.5 per cent), few banks were taking chances. Instead, most of them prefer entering into take-out arrangements with long-term financial institutions such as the IDFC (Infrastructure Development Finance Company), IIFC (India Infrastructure Finance Company), Power Finance Corporation, Rural Electrification Corporation, Hudco and the Life Insurance Corporation.

Takeout financing involved securitising infrastructure advances in favour of long-term financiers. This mechanism allowed the bankers to sell the assets to the FIs at a mutually agreeable pricing. This method is an off-balance sheeting funding. Bankers said capital pressures also drove preference for off-balance sheet funding. Currently, most banks have a capital to risk weighted asset ratio of anywhere between 10 and 12 per cent. Some banks had already reached the Government holding threshold of 51 per cent. Take-out funding, the bankers said, would release some capital resources, that would be free of reserve liabilities for meeting some of the incremental credit requirements unlike deposits or funds raised through borrowings/hybrid capital.

Takeout pricing

But pricing of the takeouts was a contentious issue with the FIs, the bankers said. The FIs were looking for high discounting rates, so as to generate yields of at least 10.5 per cent during the residual life of the asset.

Most of the banks were unwilling to concede discounting rates beyond their own cost of Tier II capital funds, which is about 8.25-8.75 per cent.

More Stories on : Infrastructure | Credit Market

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