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Issues in Infrastructure Financing

Issues in Infrastructure Financing



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Published by anshuditi
issues confronting india's infrastructure sectors
issues confronting india's infrastructure sectors

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Published by: anshuditi on Aug 06, 2009
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Issues in Infrastructure Financing
Recently, banks have been very slow in disbursing funds. With respect to infrastructure projects, the Conditions Precedent to disbursements stipulated by banks is quite stringent.Despite completing all CPs, some of the banks are not disbursing funds, citing liquidity andmarket conditions. In case of new projects, banks are hesitant in taking up fresh exposures because of the following:
Increase in cost of funds and consequent charging of higher rate of interest for infrastructure projects, say over 15%. At this interest rate, the infrastructure projectsmay not be viable. (The pricing for a reasonably well structured infrastructure projecthas moved up by approximately 300 bps in the current year. This is creating severestrain on the project costs and the projected cash flows.)
RBI prescribed group exposure ceilings
Asset-liability mismatchesBanks have also been reneging on the sanctioned terms, especially relating to interest ratesagreed in the Loan Documentation. These include even loan documents executed in thecurrent fiscal. Even if a couple of banks block disbursement, the entire disbursement schedulegets seriously disturbed.Banks are now stipulating variable interest rate formats, even during the construction period.This exposes the project to severe interest rate risk during construction and a consequent risk of shortfall in project financing. Banks are also now stipulating “credit rate spread” re-fixation after 2/3 years. This exposes projects to a lender driven unilateral interest rate risk.Several banks are already showing a significant dislike to process projects with tenor of above 10-12 years.The significant weakening of the Indian Rupee and the volatility in the Foreign Exchangemarkets have also caused a level of distress for financing infrastructure projects. Projects withimport component have seen a significant rise in project costs, causing pressure on promotersand lenders to re-evaluate the project viability and financing. On account of the highvolatility in the Foreign Exchange markets, banks have been asking for additional security for undertaking Forex Cover on exposed component of financing. This adds more strain in the project financing, since the entire security in the form of tangible assets and cashflows arecharged to the funded lenders on a pari-passu basis.Recently some of the banks have displayed a credit aversion to the sector, driven by sectoralexposure, cost escalation and lower than budgeted revenue flows. A significant portion of theinput costs like bitumen, cement etc has also been driven by higher prices. Similarly, several banks are now communicating an aversion to take large exposure in the power sector.Infrastructure projects that have predicated part of their equity funding from the capitalmarkets (either through IPO or Private equity deals) are facing a level of uncertainty.Where part disbursements from banks have already commenced for several projects, furthe
disbursements are now delayed by the banks, subject to promoters demonstrating completetie up.
A suitable system to provide ‘take out financing’ needs to be developed. TheGovernment could provide this directly or through institutions like IIFCL, PFC, RECand HUDCO etc. This could include such support to the ECBs as well, since the longtenor aversion is sharpest among overseas lenders. Even a Government guaranteedtake out at the end of say 10 years could also be explored.
Currently, the provisioning norms stipulated by RBI allow restructuring of Infrastructure projects only once during the tenor of debt (12 to 18 years). Given thelong tenor of loans and market pressures building up against such projects, thisrestriction needs to be re-looked.
The capital adequacy norms for banks, driven by the Basel II requirements, suggest provision of capital at 100% levels for the entire sanctioned amount of loan.Thedisbursements against such credit sanctions for infrastructure projects are typicallyspread over 3 to 5 years. Some relief could be provided in this context to the banks.
Currently, Infrastructure development institutions like IL&FS are not allowed to borrow and on lend under the ECB Automatic route. It is suggested to allow suchintermediation. This will help second tier/smaller infrastructure projects to access theECB markets, where they are not in a position to borrow directly from overseaslenders.
As a prudent measure, the consortium of banks financing an infrastructure projectshould stipulate that 51% of the promoters’ equity be pledged as security duringconstruction period and 26% after the CoD. The pledge of shares be available on ‘pari passu’ charge to all lenders and such collateral be taken in all infrastructure projects.
There is need for hedging foreign currency borrowings to mitigate currency andinterest rate risk. The hedgers are insisting on first charge on Pari passu basis for mitigating their risks, which dilutes the security available for the debt. The policyshould define that the second charge could be available to the hedgers.
In case of large power projects, it is practically impossible to raise foreign currencyloan as the market is totally dried up. Moreover, where the projects have tied upforeign currency loan, due to appreciation of US dollar, cost of the project has goneup which in turn put pressure on the promoters to bring either more equity which isnot available at this time or increase the debt equity ratio which may make the projectunviable. This may be taken care of to some extent by IIFC(UK) Ltd. For this purpose, the Scheme (SIFTI) mandated to IIFC (UK) which is on the lines of IIFCL,needs review.

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