DARE - Because Entrepreneurs Do

To meet the requirements of on-going infrastructure projects, severely hit by non-availability of adequate funding especially in development of airport infrastructure, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has suggested adoption of two-pronged strategy for financial institutions to extend funding to infrastructure sector.

According to ASSOCHAM, this could be done through exposure limit of Indian banking system and the refinancing facility.

In a note submitted to PMO, Planning Commission and Cabinet Secretariat, the Chamber has said, “many of the infrastructure projects are confronted with the risk-of-high-capital cost and low-operating-margins”

Given the mammoth size of these projects, it involves high initial funding requirement and a set of complex financial and contractual arrangements. Given the huge requirement of funds, there are several banks / institutions involved in the financing of such projects as no single financial entity is capable of funding them alone and therefore prefer to do it jointly.

The Chamber further says, banks have an exposure limit for the sector, individual groups and also individual entities. These limits are based on the capital of the banks and also on the prudential norms that they internally set for themselves – given the state of the economy and the sector in particular.

These limits have been proved inadequate over a period of time as the funding requirements for infrastructure projects have been very huge and most banks have been continuously been hitting their sectoral exposure limits as well as group exposure limits.

These limits should be relaxed beyond their current limits to facilitate the banks to increase their exposure for the requirements of the Core Sector in the country and support the high capital outlay of the mega projects.

Also with the spike in the interest rates over the last one year, the capital cost has substantially increased. Infrastructure projects generally have a low revenue stream during the first few years and a high capital cost will make it unviable.

High capital cost will also dissuade many from entering into these projects and creating good infrastructure projects. Either, there will be very poor response for these projects or the quality of the assets will suffer due to the high capital cost.

In order to ensure that adequate funds are flowing into the infrastructure space, the government and Reserve Bank of India should open refinance window to the banks.  This facility will help banks to lend to the infrastructure space at competitive rates which in turn will enable the infrastructure service providers to ensure adequate low cost funding to their projects thereby increasing the viability. The current costs for most infrastructure players are in the region of 12-13% p.a. while the ideal rate should be around 8-9% only.

The refinance could be either by way of a plain simple refinance at lower rates so that the banks can lend at a very competitive rate or by way of interest sub-venation where the infrastructure service provider first pays the higher rate and then gets a credit for the differential interest.

Source: ASSOCHAM

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