Opinion

Mitigating risks in infra finance

K Srinivasa Rao | Updated on October 21, 2021

Risky business Funding infra projects is fraught with risks   -  S Siva Saravanan

Banks have stepped up risk management tools. Borrowers are expected to do the same

Going beyond the near-term challenges to revive the economy, post pandemic era will call for renewed thrust to steer new infrastructure projects for long term sustainability of growth and employment generation.

Many of the new infrastructure projects will be adding green component to join the world in fighting the climate risks. The sustainable finance needs understanding its risk nuances. The RBI Governor recently highlighted the need for investment of $4.5 trillion by 2030 in the infrastructure sector. A combination of proactive policy resolutions has already been marshalled to create a roadmap.

Beginning with National Infrastructure Pipeline - 2020-25, Union Budget – 2021-22 enhancing capex allocations, National Monetisation Pipeline – 2025, Atmanirbhar Bharat Abhiyaan – Self Reliant India Mission, provision of productivity linked incentives (PLI) and now the flagship ₹100-trillion Gati Shakti Master plan. They can together create huge long-term growth opportunities.

To sustain these plans, financial institutions will need to gear up to fund them. The experience of funding large projects by FIs has not been good. Asset quality deterioration in corporate sector lending cut the risk appetite of banks. Consequently, the inability to manage the risks in funding them impacted FIs’ lending in this area. The reasons could be increasing complexity of risks both for FIs and entrepreneurs.

In a bank led economy when the risks of commercial banks in funding infrastructure projects are on rise, creating an enabling environment by collective action by stakeholders is essential. Besides credit risk (loan default risk), banks have to manage among others, liquidity risks, price risks arising out of asset liability mismatches. The business model of commercial banks thrives on augmenting deposit resources. With emergence of alternate investment and saving avenues, bank deposits are getting increasingly into shorter duration (1-3 years and 3-5 years) clusters. Whereas, infrastructure projects are for longer duration exacerbating the liquidity risks for banks.

The crises in IL&FS, Dewan Housing finance Corporation Ltd (DHFL) and most recently SREI Infrastructure Finance Ltd are examples of how risks can cost to the organisations.

It can be recalled that based on the recommendations of SH Khan Committee on — ‘Harmonizing the role and operations of development financial institutions and banks in India’ set up by RBI in 1997, the concept of universal bank entered the banking lexicon truncating the presence of term lending institutions. ICICI Bank and IDBI Bank are the result of it.

In one of its regular deliberations, RBI pointed out the dichotomy. While a big push for certain mega infrastructure projects could “reignite the economy”, but banks, still saddled with infra related non-performing assets (NPAs), may not be best placed to finance these projects.

Enterprise risk management

While banks are normally blamed for the deteriorating asset quality, the lack of enterprise risk management (ERM) among borrower community, particularly those engaged in large infrastructure projects/corporate sector rarely comes under scrutiny. The risks of projects due to slack governance and ERM rigour leads to default on bank loan repayments.

Banks have revamped risk management architecture at the behest of RBI in many ways by institutionalising proactive credit monitoring tools. The most effective among them – Special Mention Accounts (early alert system) and Central Repository of information on large credits (CRILC), Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) to illustrate some of them to mitigate risks.

Entrepreneurs driving large infrastructure projects should also strengthen governance, risk and compliance (GRC) built into its ERM practices. Predominant risks could be environmental risks, regulatory risks, external risks, geopolitical social risks, time and cost overrun risks, catastrophic risks, operational risks and many more. In the mileu of such risky operating environment, enterprises have to undertake extensive capacity building in integrating ERM by embedding people and systems competency.

Understanding the constraints of banks, the Union Budget 2021-22 proposed the formation of Development Financial institution (DFI) to finance the infrastructure sector. The newly formed DFI will be known as National Bank for Financing Infrastructure Development (NaBFID). It is expected to garner resources of up to ₹5 trillion in next three years.

A simultaneous strengthening of network of all India financial institutions – Nabard, EXIM Bank, SIDBI and NHB – will be essential to supplement the efforts of NaBFID. Banks can also coordinate for funding working capital needs of the new set of entrepreneurs.

Enhancing rigour of GRC is not only essential for FIs but equally in infrastructure entities that are more susceptible to risks with potential to create collateral damage to the entire financial ecosystem. In addition to the RBI, the sectoral regulators and stakeholders have to keep an eye on the GRC framework implemented in infrastructure entities. A cue can be taken from the Gati Shakti framework that integrates 16 government departments digitally to tackle hurdles at nascent stage and collaborate to speed up project execution. The need is to create cluster of mini Gati Shakti models within the organisations to enhance risk management.

A sound GRC framework is critical to boost recovery and growth in the post-pandemic period. Removal of silos, sharing of information, commitment to remove hurdles will be essential tools of risk management. Improving risk management culture in every commercial organisation by training people, upgrading technology and systemic controls will be essential if long-term growth is to be ensured.

The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views expressed are personal

Published on October 21, 2021

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