Where trade goes, finance only follows. This maxim certainly holds true in the case of Chinese banks that are emerging as major lenders to Indian firms, especially those executing large infrastructure projects and many of whom are now struggling to raise funds through other sources. On Monday, Lanco Infratech signed an agreement with China Development Bank (CDB), which would extend and syndicate through other banks loans of $ 2 billion for two of its power projects with total 2,600 mega-watt capacity. This follows similar tie-ups for loans aggregating $ four billion by the Anil Ambani-promoted Reliance Power and Reliance Communication. Most of this financing is towards import of power equipment and telecom gear from the likes of Shanghai Electric, Dongfang and Huawei Technologies.
On the face of it, these deals represent win-win for both sides. For Chinese boiler and turbine-generator makers or telecommunications network equipment suppliers, the ability to offer credit facility through CDB, Export Import Bank of China and other state-owned financial institutions adds to their competitiveness. The Chinese here are only emulating the Japanese, whose banks, too, followed wherever their companies went to generate additional business both for the latter and themselves. This is also a logical consequence of countries, which have been consistently posting trade surpluses, turning into capital exporters or even seeking a greater international role for their currencies: China’s recent initiatives to extend Renminbi-denominated loans to other BRICS nations are probably part of this larger strategy. From the borrowers’ standpoint also, being able to access Chinese project finance – when funding from all other sources, including Indian banks, has dried up – is certainly welcome, more so for debt-laden entities like Lanco and Reliance. The latter has, in fact, used some of the Chinese loans to refinance its outstanding foreign currency convertible bonds. The Government, only last September, permitted Indian infrastructure firms to avail of up to $ one billion of external commercial borrowings annually in Renminbi.
The only ones not to have taken too kindly to the Chinese banks offering Yuan loans for financing of project goods imports are domestic power equipment suppliers like BHEL and L&T. Cheap credit, in combination with the formidable economies of scale that Chinese manufacturers already possess, will simply kill the local industry, they say. While these fears may not be totally unwarranted, it is also a fact that India desperately needs power; in this case, if the Chinese are willing to provide credit lines to fund-starved developers, how can anyone object? Rather than opposing equipment imports just to protect the domestic industry from competition, the focus should be on preventing recourse to dumping or predatory pricing by overseas suppliers. Equally, there must be strict monitoring and heavy penalties against any substandard equipment getting installed in power plants. And that’s where the Central Electricity Authority can be made to play a more effective role.