Banks face external risks in funding infrastructure projects

Our Bureau Chennai | Updated on November 11, 2011

The concerns are crucial considering the need for infrastructure growth to support the economy.

Banks' exposure to the infrastructure sector has been ‘rendered dangerous' by risk factors external to the project, according to Mr M. Narendra, Chairman and Managing Director, Indian Overseas Bank.

Policy changes, land acquisition issues, environment-related concerns, power availability, fuel linkage are some of the factors that have emerged in recent times to threaten viability of infrastructure projects and dampened the enthusiasm of funding institutions to participate in such projects. Even exposure to State Electricity Boards through power projects is hit by changes in the long term power purchase agreements, which need to be transparent.

The concerns are crucial considering the need for infrastructure growth to support the economy. Banks have primarily supported infrastructure projects in recent years and have a significant portfolio in funding infrastructure across the board, including power, roads, telecom, education and hospitality.

Addressing a panel discussion at the South India Infrastructure Investment Summit 2011, he said the basket of funding sources needs to be widened to fully support the growth in infrastructure.

Policy measures to attract foreign funds, domestic and international insurance and pension funds are needed, he said.

Mr Sidharth Rath, Head – Infrastructure Business, Axis Bank Ltd, said banks have contributed to the bulk of funding for infrastructure in the last five years but today find themselves at a stage when external issues pose a risk.

Banks also need to be supported with more sources of funds for infrastructure funding and to recycle funds. Innovative refinancing options has to be used as banks take the initial developmental and implementation risks. Regulatory guidelines are needed for long-term external borrowings and to tap other foreign resources including sovereign funds.

Mr Keiichi Niinuma, Deputy Manager, Global Structured Finance Sales Division, Mizuho Corporate Bank, said that the present policy makes it difficult for foreign banks to provide loans for infrastructure here.

To provide long-term loans banks need some assurance on the long-term revenues from projects. A public guarantee or a third party guarantee is needed to compensate for shortfall in revenue against the initial estimate revenues. Measures to mitigate foreign exchange risks are also needed. Developers should also follow environmental guidelines laid down by the World Bank to be able to access foreign bank funding, he said.

Published on November 11, 2011

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