Sunil Gupta, Director, Punjab National Bank is of the opinion that India needs to raise long-term funds by way of bonds. He is also optimistic about the proposed 5/25 scheme as it is backed by skilled appraisal and smart monitoring, ensuring that end use of funds will yield desired results.
The Projects Monitoring Group headed by the Prime Minister recently cleared projects worth Rs 4.2 lakh crore. It´s a huge amount but the question remains how will these projects see the light of day unless funded? Does India have strength to fund these projects?
I believe that the annual fund requirement of these projects will not go beyond Rs 50,000 crore as this will be done in phases, hence planning should be proposed accordingly. Then we have the present government which is working hard to attract foreign funds. India has become one of the most preferred investment hubs not only in Asia but in the entire world. Hence, procuring funds for infrastructure projects should not be that big a deal.
We need to fix certain issues with regard to banking, for banks to lend in the infra sector -
1. Presently banks are expected to provide for capital on the basis of sanctions issued; whereas actual disbursement of loans is expected to take place over minimum four-five years. It would only be in order, if capital provisioning for banks is required for amounts proposed to be disbursed within next 12 months.
2. The present NPA norms must be changed to insulate from regulatory delays, where the project viability is intact.
The big deal, however, is the execution of projects, which has always been the most painful area. Say, to understand the plight of the infrastructure sector, we should tave a look at the past instances and the factors responsible:
(a) In a number of cases, Right of Way (ROW) has not been provided for a long time or provided with a delay of 2-3 years or provided in tranches, say 50 per cent or 60 per cent. The responsibility of ROW lies with the government of India/NHAI. This delay has affected the viability and cost of project adversely.
(b) Government clearances are a very big hurdle in the success of any road project. Permissions from Environment Ministry or Ministry of Railways etc., are still taking a long time. Again ultimately this increases the cost of project and affects the viability of the projects.
(c) Non-induction of funds in a timely fashion by promoters or grant by NHAI/PWD etc.
(d) Non-declaration of provisional COD by NHAI/PWD despite completion of 80 per cent or more work by the concessionaire.
(e) Closure of toll plazas by State governments.
Besides, due to various other extraneous factors, many road projects have been stalled, which has resulted in such assets becoming NPAs. Further, there have been rigid stances adopted by the NHAI/concessionaire etc., in various road projects. As such banks have become extremely cautious in funding road projects.
Enough has been talked about land acquisition, forest clearances, displacement, compensation etc., and measures have been taken to improve the scenario. Where should a project proponent go and knock the door to get funds?
Banks are the foremost option. The banking sector has played a vital role to give a momentum to growth of the Indian economy by providing finance to major infrastructure areas like roads, power, steel etc. Let me explain. In case of the road sector, there are three parties related to a project i.e., concessionaire, lenders (banks) and government of India or NHAI or PWD (implementing agency). The role of bankers is to provide need-based financing to the projects looking into their viability and they have played a very supportive role to the segment resulting in a very good network of roads in the country. But there is still a long way to go. Despite a supportive role of banks in funding these projects, there have been allegations of improper due diligence, excessive financing etc., on the part of the banks.
Other alternative funding methods may be:
A. The government may design, finance and build the asset, and operate and maintain it in the initial years. Thereafter, it could refinance the project with private sector capital after it is built and revenue streams have been proven.
B. The minimum revenue and traffic guarantees are common forms of government support in most Latin American countries. The minimum traffic guarantee for the project provides for an extension of the concession term in the event traffic falls below minimum levels. It also includes a minimum traffic guarantee with cash compensation and a maximum ceiling above which all revenues are transferred to the government.
C. Government funding either to substitute or supplement private finance, through providing project debt on a ´pari passu´ basis.
Since the RBI has now relaxed norms on bond financing and there is a 5/25 scheme, will it meet the infrastructure funding needs?
Yes, we need to fund projects on a long-term basis, but the current mainstream lenders, i.e., banks, do not have long-term funds. We need to raise long-term funds by way of bonds.
The proposed 5/25 scheme by Reserve Bank of India is backed by skilled appraisal and smart monitoring ensuring that end-use of funds will yield desired results. The banks have already funded road projects which are stuck due to various reasons and affecting the funding position of banks. As such, the scheme may be widened to cover the existing loans given by the banks.
At a recent IBA conclave, some experts suggested that Indian financial regulators should implement sector-based models. Why is India not inspired by such models?
As far as borrowing any successful models from overseas is concerned, the Indian government will need to evaluate these as per domestic conditions. You cannot say that anything which is workable in other nations will also be good in the Indian context.
Road projects in the country that are ready and would require about Rs 50,000 crore of bank funding. How are banks likely to take this challenge to fund such massive need?
The road projects undertaken in the first phase were bid very aggressively by the promoters without much feasibility study. The same were also funded by the banks and FIs without understanding the associated risks. As a result many such developments are not achieving the projected results and are thus creating stress for the banks and the promoters. With this background, banks have very little appetite and expertise to undertake funding of such projects.
What are the typical constraints which have not allowed IDFs a alternate method?
We have to understand that we require very deep market for IDFs to be tradable; else it will be difficult to efficiently price such products considering long tenure of the paper. Let me share with you some facts.
IDFs introduced by Government in 2011, can be formed under two methods i.e., one under Mutual Fund route and another is NBFC route. IDF can be set up as a Trust (Mutual Fund) or as a company (NBFC).
IDF (MF) can finance any project. However, IDF (NBFC) may invest only in PPP and post COD infrastructure projects. Besides, IDF (NBFC) has its own limitations like fixed rate of interest for entire period, priorities over senior lenders in case of termination of projects, restriction for lending i.e., 60 per cent of its capital.
Moreover, the IDF (NBFC) has been formulated for takeover loans for the projects which have success¡fully completed one year of commercial production. However, the government may encourage LIC, pension funds etc., to invest more and more funds in these projects either through Mutual Funds or by forming NBFCs. Secondly, IDF (NBFC) should have approval to take over the projects at construction stage, say after one year. These types of Mutual Funds and NBFCs should be popularised by the government.
Bad planning always causes project delays. But the reality seems to be different as we see just one side of the coin. What is the other side of the coin?
I believe that during the last two-three years, due to the sluggish economy, faulty policies of the government and undue delay in project completion, the viability of the projects has been affected. Accordingly, the concessionaires have approached banks/lenders for restructuring of their loans. CDR has proved to be a major blessing for such projects for bringing them back on the rails. CDR or restructuring systems of banks have certain guidelines or criteria, only after fulfilling their criteria the advances/loans are considered for restructuring. After ascertaining the viability of the project and ensuring that only those projects which are viable are to be restructured, this will pave the way for economic return of the projects which would benefit all the stakeholders in the long run.
India requires long-tenor and low-cost funds, and despite having funds like Infrastructure Debt Funds (IDF), such funds are yet to gain pace. Do you see IDFs as the best bet in the present scenario?
IDFs may become the best scenario, so long as we can get investors to invest in such funds by efficient pricing, which these projects can afford. IDF must offer tax incentives, deep markets for trading/liquidity.
The idea of IDFs was envisaged three years ago. However, we haven´t witnessed any headway in this context except in a few areas. What are your thoughts on how successful the concept of IDF would be in India?
This depends on investors´ perception and how the government advances to make the same favourable.
I have already talked about liquidity and efficient pricing, which will be the key to their success in India.
Restructuring of loans, especially Corporate Debt Restructuring (CDR), is a regular affair in India these days. However, will this help projects? Don´t you think corporates can take undue advantage of this?
Failure is normally due to lax monitoring of debt and skill to identify/differentiate the project if it deserves CDR/ support or not. So long as bank managements are manageable, corporates can always take advantage. We need to develop skills at banks and ensure a transparent process to address this issue. Strict penalties must be imposed on bankers, if the CDR fails, banks must take responsibility for CDR to work.
What kind of enthusiasm are you seeing on part of banks to lend to the infrastructure segment? We have seen a lot of banks shying away from lending to infra projects in this kind of an environment.
Banks were very enthusiastic to lend to infra projects in the last five-six years but never had the skill to identify the risks. The result today is that most infra exposures are stressed. Now banks reject all infra proposals, having burnt their fingers. The real issue is the banking skill to identify the real infra projects, which are viable, monitor them well, back the right promoter, desired results can be achieved. But normally the lenders either fund all the projects/promoters or reject all the projects/ promoters; this clearly indicates that the banks do not have the skill to differentiate the investment opportunity and follow the herd.
Banks are keen to further finance this sector, but certain issues are to be paid heed to:
1. Banks are facing shortage of capital due to high provisions, mounting NPAs, thin margins, Basel III norms. The government has indicated further divesting the nationalised banking sector by reducing its stake from 58 per cent to 51 per cent, which will improve fund position and capital infusion of the banks.
2. Banks are facing an asset-liability mismatch. But with the recent RBI policy (5/25 scheme) moves for existing clients and also allowing IDFs (NBFC) for new projects, the banks may churn out their existing infrastructure portfolio to these IDFs (NBFC) or they may refinance their own existing advances looking into viability and will be able to provide more time to concessionaire for payment (within concession period) without it becoming restructured assets. By these ways, this mismatch may be resolved to a certain extent.
3. IDF may be given certain other lucrative features like income-tax rebate, etc.
4. Better coordination between government depart¡ments, Ministries like Ministry of Environment, Railways, MoRTH, and NHAI etc., so as to ensure timely clearances for the road projects.
5. The government/NHAI should come out with a policy for road sectors with 100 per cent ROW before bidding for the project, timely declaration of provisional COD or COD in tranches say for minimum 25 km, timely release of grants, timely release of annuities, government guarantees to the lenders for their funding, 100 per cent payment in case of terminations of the projects and providing all clearances to the concessionaire.
6. Single Window Clearance system for the infrastructure sector.
7. Quick approvals from the Ministries for ensuring supply of fuel linkages, spectrum allocation etc.
What kind of credit enhancement schemes would you feel are appropriate for the country´s infrastructure finance market?
We need dynamic pricing for infra lending. The banks must price the lending at high rates when the risks are high and once the project is de-risked, the long term funds must chip in to re-finance the portfolio. In the process, the bank will generate the risk capital to fund infra projects and even the projects will benefit from lower pricing once they achieve the milestones.