Financing infrastructure

The Reserve Bank of India’s decision allowing banks to issue long-term bonds of minimum seven years maturity, and exempt the monies raised from reserve/priority sector lending requirements if used for infrastructure sector funding, is well-conceived. Infrastructure projects have large capital requirements and also long gestation periods. A typical highways project has a construction period of three-four years, during which it does not generate any cash flows. Revenue from tolls start only from the commencement of commercial operations and these are spread over a concession period of 25 years or more. With infrastructure debt funds yet to really take off and the limitations of IIFCL, IDFC and other term lenders, the burden of financing such projects will continue to lie with banks for some time. But banks are constrained by the fact that their deposits are usually not longer than five years. Since lending against them barely covers the construction phase, it leads to an asset-liability mismatch (ALM).

Such mismatch can be avoided if banks are able to access long-term funds at relatively low cost. The RBI’s latest move — which follows Finance Minister Arun Jaitley’s Budget announcement — facilitates both. Banks today are required to keep ₹4 out of every ₹100 mobilised as deposits with the RBI, on which they earn no interest. They also have to compulsorily invest another ₹22.5 in government securities, apart from earmarking 40 per cent of their credit to so-called priority sectors. These pre-emptions — resulting in loss or lower income than what would accrue from regular lending — will not apply to the funds raised from the seven-year plus tenure bonds that banks can now float. Banks may well pass on the cost savings from regulatory exemptions on such bonds by offering higher interest. The fact that the issuers would largely be public sector banks will make these bonds particularly attractive to insurance firms and provident/pension funds.

But infrastructure projects aren’t just a matter of financing. Even the problem of ALMs is addressable through mechanisms such as a new lender ‘taking-out’ the loan from the books of the original lending bank after five-seven years. The real issues faced by highways or power project developers today relate to green clearances, land acquisition or absence of fuel linkages. These have mainly to do with the quality of governance and official decision-making processes rather than financing per se . Indeed, it is the inability to secure statutory approvals in time that has led to many infrastructure projects ending up as stressed loans for banks. Enabling banks to extend financing to the infrastructure sector — whether by granting exemptions from regulatory pre-emptions on long-term bond issuances or permitting flexible structuring and refinancing of loans to projects — is certainly a welcome step. But that alone isn’t enough to guarantee project viability.

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