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JNANA VARDHINI
SIBSTC MONTHLY NEWSLETTER -COVERING
CONTEMPORARY BANKING RELATED TOPICS
9th Issue
APRIL- 2011
SOUTHERN INDIA BANKS’ STAFF
TRAINING COLLEGE
No.531, Faiz Avenue, 11th Main, 32nd Cross
IV Block, Jayanagar, BANGALORE-560 011
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RBI MONETARY POLICY FOR 2011-12 ANNOUNCED ON
03.05.2011- HIGHLIGHTS
1. Global commodity prices may surge further over the course of the year indicating
higher inflation.
2. The weighted average overnight call money rate will be the operating target of
monetary policy of the RBI.
3. Henceforth, only the repo rate will be a varying policy rate to signal the monetary
policy stance more accurately.
4. The Reverse repo rate will be pegged at a fixed 100 bps below the repo rate.
5. RBI will be instituting a new Marginal Standing Facility (MSF). Banks can
borrow overnight from the MSF up to 1% of their respective net demand and
time liabilities or NDTL. The rate of interest on amounts accessed from this
facility will be 100 bps above the repo rate.
6. The repo rate has been increased by 50 bps. Accordingly, it goes up from 6.75%
to 7.25%.
7. The reverse repo rate will stand adjusted at 6.25%.
8. The Marginal Standing Facility (MSF) rate will be 8.25%
9. The Bank Rate remains at 6.0%.
10. CRR remains unchanged at 6% of NDTL
11. SLR remains unchanged at 24% of NDTL.
12. Savings Deposit(SB) Interest Rate:
Pending a final decision on deregulation on SB rate, the savings bank deposit
interest rate is increased from the present 3.5% to 4.0% with immediate effect.
13. Indian Economy was estimated to have grown at 8.6% for 2010-11. The GDP
Growth for 2011-12 is placed at around 8%
14. The projection for WPI inflation for March 2012 is 6% with an upward bias.
15. The Liquidity position is in the comfort zone of RBI.
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16. Under Financial Inclusion to provide banking access to all villages with
population of over 2000 by March 2012. There are 72,800 villages identified as
falling into this category. RBI is asking banks to ensure that at least 25% of the
new branches being opened during this year are located in tier 5 and tier 6 centers.
17. The Provisioning requirements on certain categories of NPAs and restructured
advances will be enhanced.
18. The investment by banks in liquid schemes of debt oriented mutual funds will be
subject to a prudential cap of 10% of their net worth as on March 31 of the
previous year.
CURRENCY WARS
What is a ‘currency war’?
It is a competition between nations to lower the value of their sovereign currency in order
to give a boost to exports and the sagging domestic economy.
Why there is a “currency war”?
The world is witnessing an ongoing economic war, as every country wants to be
economically developed, compete with other progressive countries in terms of trade and
economic growth. Similarly there is an ongoing currency war in which nations compete
with one another to lower the value of their domestic currency in order to help the home
industries gain greater profits from exports.
The currency war recently restarted following a conflict of interest between the United
States and China.
The U.S. has been struggling against a massive fiscal deficit and foreign debt in recent
years, especially since the global financial crisis. With so much at stake, the era of U.S
dollar hegemony seems to be ending.
China has been raking in profits from its biggest export market, the U.S, by keeping its
sovereign currency YUAN, also known as the renminbi, undervalued. China has also
been purchasing U.S. treasury bonds to add to its foreign reserves, worth more than $2
trillion.
In September, the U.S. House of Representatives passed the Currency Reform for Fair
Trade Act. Under the bill, the U.S. is allowed to slap tariffs on goods from China and
other countries whose currencies are perceived to be undervalued. Basically, it is U.S
who is directly or indirectly pushing China to allow the YUAN to appreciate.
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But China does not want the value of its currency to increase because a stronger Yuan
will hurt Chinese exporters who will see a decline in exports to the U.S. once the value of
home currency rises.
As the recent currency war continues to spread around the globe, some countries are now
saying that there is a need for a new Plaza Accord to stabilize the world economy and the
global financial market and also the unbridled war for currencies and exchange rates.
US vs CHINA - Whether the ongoing currency war- A cause for concern?
Tensions have been rising over China’s Yuan policy ever since the US President depicted
China as “currency manipulator,” during his earlier days in office. Western countries
along with some emerging economies are of the view that China is deliberately
manipulating Yuan’s value not allowing it to appreciate. They opine, China is following
various means to keep Yuan value deliberately low, like buying dollars and other forex
currencies, pegging it to the dollar etc. IMF also shares this view and called several times
on China to allow Yuan to appreciate to correct global economic and trade imbalances.
Lower Yuan value is making Chinese products more competitive in the global trade, due
to which China is able to amass trade surplus in hundreds of billions of dollars, according
to the developed economies. China disagrees with the west’s contention and says that it is
not responsible for the problems faced by the Western countries. China says the
developed countries have many problems created by them that require immediate
attention. It is not fair for the west to attack Chinese Yuan Policy without reforming their
financial regulatory laws, due to which the western states are not in a position to control
the “too-big-to-fail” (or “too-important-to-fail” according to the IMF) financial
conglomerates, China says.
RBI - LIQUIDITY ADJUSTMENT FACILITY
Background:
In India, the forex reserves increased from US $ 54 billion as at the end of March
2002 to US $ 305 billion by April 2011. These forex flows have implications for
the conduct of domestic monetary policy and exchange rate management. The
liquidity impact of the inflows was managed by RBI mainly through the day-today Liquidity Adjustment Facility (LAF) and OMO. In addition, the measures
taken to deal with these inflows included building up of government balances
with the Reserve Bank particularly through Treasury Bills, forex swaps, prepayment of external debt, liberalization of current and capital outflows and
measures to restrict debt inflows. These flows cannot be easily predicted due to
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which the monetary authorities have to make choices for day-to-day exchange
rate and monetary management.
Intervention by Monetary Authority:
When the monetary authority intervenes in the foreign exchange market through
purchases of foreign exchange it injects liquidity into the system through the
corresponding sales of domestic currency. Conversely, when it sells foreign
exchange, the domestic liquidity is absorbed from the system. Such operations in
the foreign exchange market cause unanticipated expansion or contraction of base
money and money supply, which may not necessarily be consistent with the
prevailing monetary policy stance.
What is Sterilization?
There are two approaches to offset the impact of forex inflows i.e. market based
or non-market based.
The market based approach involves financial transactions between the central
bank and the market, which leads to withdrawal or injection of liquidity.
The non-market based approach involves the use of quantitative barriers, rules or
restrictions in market activity, which attempt to keep the potential injection of
liquidity outside the domestic financial system.
The market based approach aimed at neutralising part or whole of the monetary
impact of foreign inflows is termed as sterilization. Conceptually the sterilisation
process involves:


Decision of the monetary authority to intervene by substituting foreign
currency with domestic currency in case of excess capital inflows.
Decision to intervene further in the bond or money market to substitute
domestic currency so released out of the intervention in forex market with
bonds or other eligible paper.
While Open Market Operations (OMO) involving sale of securities constitute the
commonly used instrument of sterilisation, there are several other instruments
available to offset the impact of capital inflows on domestic money supply.
Existing instruments for sterilization The appropriate mix of instruments would
depend on the prevailing circumstances, the associated costs and benefits, and the
opportunity cost of not using sterilisation as a policy option. While RBI can
strengthen and refine the existing instrument (such as LAF, OMO, CRR etc), it
can also explore new instruments appropriate in the Indian context.
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Liquidity Adjustment Facility (LAF)
LAF involves absorption or injection of liquidity by way of sale or purchase of
securities followed by their repurchase or resale under the repo/reverse repo
operations. Such operations have the added advantage that sale of securities does
not require the financial system to take the market risk involved in such purchase
of securities. Further, the access to this facility is at the discretion of market
participants enabling them to undertake their own liquidity management.
Thus, this facility has all the advantages of reserve maintenance without being an
across-the-board mandatory requirement. In effect, the LAF has also effectively
acted as an instrument of sterilisation. Operations under LAF require the
availability of adequate stock of government securities with the Reserve Bank.
These operations involve costs, which impact the balance sheet of the Reserve
Bank. When the LAF is used as an instrument of sterilisation, it loses its character
as a day-to-day liquidity adjustment tool operating at the margin.
Open Market Operations (OMO)
OMO involves the sale or purchase of securities with the objective of absorbing
excess liquidity in the system through outright sale of securities or injecting
liquidity by purchase of securities. It is the main instrument of sterilisation used
by the RBI. RBI can make use of this instrument as and when necessary, but in
view of the finite stock of government securities with RBI, such operations for
sterilisation can obviously not continue indefinitely. OMO sales entail the
permanent absorption of the liquidity.
Balances of the Government of India with RBI
The surplus balances of the Government with the RBI effectively act as an
instrument of sterilisation. As the RBI Act does not permit payments of interest
on Government balances, these balances are invested in government securities
held in the portfolio of RBI, thus enabling Govt. to obtain a return on such
balances. As a consequence, the stock of government securities to that extent
becomes unavailable for monetary management operations like LAF and OMO.
Forex Swaps
Some central banks use foreign exchange swaps for sterilisation as it helps
postponement of creation of liquidity generated by capital inflows and the
consequent accretion to reserves. The cost of such swaps gets reflected in the
premium paid by the central bank and the earnings on the foreign exchange
reserves foregone. The extent to which such swaps can be undertaken depends on
the depth of the forex market. Such operations could result in pressure on the
market to meet deliveries. Further the cost of swaps can increase with the
appreciation of the Rupee.
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Cash Reserve Requirements (CRR)
The use of CRR as a direct method of monetary policy intervention has the ability
of sterilising liquidity by raising the proportion of NDTLs of banks to be kept
impounded with the RBI. It is an inflexible instrument of monetary policy that
drains liquidity across the board without distinguishing between banks having idle
cash balances from those that are deficient. In case, CRR is not remunerated, it
has the distortionary impact of a “tax” on the banking system.
New Instruments
Issuance of Reserve Bank Securities
In the context of a declining stock of government securities with RBI to conduct
sterilisation operations, issuances of securities by RBI could be enabled to
facilitate OMO. A number of central banks in emerging market economies have
resorted to issuance of central bank paper to facilitate sterilisation. Issuance of
central bank securities can fragment the debt market due to availability of two
competing sovereign issues, one of the Government of India and the other of RBI.
Normally central banks issue securities at the short end of the maturity spectrum,
on the premise that the capital inflows are transient and may reverse over a short
period; in the event of reversal, liquidity could be matched by the maturing central
bank paper.
Market Stabilization Bills / Bonds by Government
In view of the finite stock of government securities available with RBI for
sterilisation, Govt. could issue a special variety of bills/bonds for sterilisation
purposes. To operationalise such a new instrument of sterilisation and ensure
fiscal transparency, the Government could consider setting up a Market
Stabilisation Fund (MSF) to be created in the Public Account. This Fund could
issue new instruments called Market Stabilisation Bills/Bonds (MSBs) for
mopping up enduring surplus liquidity from the system over and above the
amount that could be absorbed under the day to day repo operations of LAF. To
impart liquidity to these bills/bonds, they may be raised through auctions and
permitted to be actively traded in the secondary market. The amounts raised
would be credited to the Market Stabilisation Fund.
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INFRASTRUCTURE FINANCING BY BANKS
Article Published in IBA’s Monthly Journal “The Indian Banker” for the
Month of April 2011.
(Authors of the Article: Sri. K L S N Rao, Principal, Southern India Banks’ Staff
Training College & Sri. S. Murali, Director of a Training & Consulting
organization)
Definition:
Infrastructure is generally defined as the physical framework of facilities through which
goods and services are provided to the public. Infrastructure covers wide spectrum of
services and transportation. The development of infrastructure is the sine qua non to the
development of an economy. It is well understood that the responsibility of infrastructure
development in the country is of the Government. Infrastructure development involves
huge resources (finance and time).
Due to restrictions self imposed by the country in minimizing the deficit financing under
Fiscal Responsibility and Budget Management (FRBM), and also prioritizations of
various other developmental functions, government alone will not be in a position to take
up huge projects involving very high costs due to paucity of funds. Given these glitches,
Public Private Partnership (PPP) is found to be a viable model for funding and
development of huge infrastructure projects.
This article deals with the role of banks in Infrastructure Financing and the key issues
involved.
Definition of ‘Infrastructure”
Reserve Bank of India has defined “Infrastructure” to cover projects in the following
areas:
Developing, operating and maintaining or developing, operating and maintaining any
infrastructure facility that is a project in any of the following sectors, or any infrastructure
facility of a similar nature:




A road, including toll road, a bridge or a rail system
A highway project including other activities being an integral part of the highway
project
A port, airport, inland waterway or inland port
A water supply project, irrigation project, water treatment system, sanitation and
sewerage system or solid waste management system
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







Telecommunication services whether basic or cellular, including radio paging,
domestic satellite service (i.e., a satellite owned and operated by an Indian
company for providing telecommunication service), Telecom Towers, network of
trunking, broadband network and internet services
An industrial park or special economic zone
Generation or generation and distribution of power including power projects
based on all the renewable energy sources such as wind, biomass, small hydro,
solar, etc.
Transmission or distribution of power by laying a network of new transmission or
distribution lines.
Projects involving agro-processing and supply of inputs to agriculture
Projects for preservation and storage of processed agro-products, perishable goods
such as fruits, vegetables and flowers including testing facilities for quality
Educational institutions and hospitals.
Laying down and / or maintenance of pipelines for gas, crude oil, petroleum,
minerals including city gas distribution networks.
Any other infrastructure facility of similar nature.
Why Infrastructure is Important:
 Its linkages to the economy are multiple and complex, because it affects
production and consumption directly.
 The availability of adequate infrastructure facilities is a necessity for overall
economic development of a country.
 Infrastructure facilities are often referred to as wheels of growth or engines of
growth.
 Infrastructure is the key for growth of all the sectors of the economy with
multiplier effect leading to overall growth in GDP & economic stability
 On account of India’s improved importance for infrastructure development, GDP
is consistently growing since nineties.
Achieved a GDP growth of 7.4% for 2009-10 despite continued global recession and
aims to achieve 8.5% for 2010-11. India aims to achieve double digit GDP growth and
attain the status of financial superpower by 2020.
How much of investments required for infrastructure development?
 Developing nations need to make massive investments of 5% of GDP per year
and this will continue to increase substantially over a period of time because of
demand created by economic growth, rising population, rapid urbanization, and so
on.
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 The 11th Five year plan (2007-12) envisages allocation of 9% of GDP i.e an
amount of Rs 20, 56,151 crore for infrastructure development.
 Of the massive investment, 30% is expected to be financed by private sector.
 In 12th Five year plan, the investment estimated is US $ 1 Trillion
What Constitutes ‘Infrastructure Lending’?
As per RBI guidelines, any credit facility in whatever form extended by lenders (i.e.
banks, FIs or NBFCs) to an infrastructure facility falls within the definition of
“infrastructure lending”. In other words, a credit facility provided to a borrower company
engaged in developing or operating and maintaining, or developing, operating and
maintaining any infrastructure facility that is a project in any of the above sectors.
What is Public Private Partnership?
PPP or P3 is a government service or private business venture which is funded and
operated through a partnership of government and one or more private sector companies.
PPP involves a contract between a public-sector authority and a private party, in which
the private party provides a public service or project and assumes substantial financial,
technical and operational risk in the project. In some types of PPP, the cost of using the
service is borne exclusively by the users of the service and not by the taxpayer.
A PPP Project means a project based on a contract or concession agreement, between a
Government or a statutory entity on the one side and a Private Sector Company on the
other-side, for investing in construction and maintenance of infrastructure asset and /
or delivering an infrastructure service.
Why PPP?

Lack of adequate funds with Government for development of infrastructure

Infusion of Professionalism

Risk sharing by Private Partners

High Quality Service provided to the Government by the Private, for a long
period

Faster development of the infrastructure thereby higher growth of the economy as
a whole
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Key success factors for PPP
As per the National Council for Public Private Partnerships the following six factors are
vital for the success of the Project:
1. Political Leadership
2. Public Sector involvement
3. A well thought out plan
4. A dedicated income stream
5. Communication with all stake holders
6. Selection of the right partner
PPP Process – Project Delivery Lifecycle
1. Opportunity Identification
2. Opportunity Assessment
3. Tender Preparation
4. Partner Selection
5. Contracting
6. Project Realisation
7. Performance Monitoring
8.
Project Conclusion
Various Models of PPP
Build-Operate-Transfer (BOT)
Under this model, the private partner builds a facility to the specifications agreed to by
the public agency, operates the facility for a specified time period ( concession period)
under a contract and then transfers the facility to the government at the end of the
specified period of time. During the operation period, the private partner is authorized to
collect a user charge which forms the basis for bank loan recovery. This is
predominantly used in Road projects.
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Build-Own-Operate (BOO)
Here, the private partner builds and operates the facility without transferring the
ownership to the government. There will be no obligation on the part of the government
to purchase the facility or to get the title transferred to its name. This is applicable for
Power and Telecom projects.
Build-Own-Operate- Transfer (BOOT)
Similar to BOO except that at the end of the contracted period, the facility will be
transferred to Government. This model used in roads and ports.
Buy-Build-Operate (BBO)
A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing
facility. The government sells the asset to the private sector entity, which then makes the
improvements necessary to operate the facility in a profitable manner.
Build – Operate – Lease – Transfer (BOLT)
The Infrastructure Asset is leased to the Govt. upto a specific period for a fixed rent and
after completion of the fixed period; the private sector entity transfers the ownership to
the Govt. Applicable under “Own your Wagon” scheme of Indian Railways
Build – Own – Operate – Share – Transfer (BOOST)
This is applicable in development of Ports.
Contract Services
Operations and Maintenance
Here the government enters into a contract with a private partner to provide and/or
maintain a specific service. Under this model, the government retains ownership and
overall management of the public facility or system.
Design-Build (DB)
Here, the private partner provides design and constructs the project. This model helps in
the reduction of time, save money and transfer risk to the private partner. The
government owns the assets and has the responsibility for the operation and maintenance.
Design-Build-Maintain (DBM)
A DBM is similar to a DB except the maintenance of the facility for some period of time
becomes the responsibility of the private sector partner. The benefits are similar to the
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DB with maintenance risk also being transferred to the private sector partner. The
government owns and operates the assets.
Lease/Develop/Operate (LDO) or Build/Develop/Operate (BDO)
Under these arrangements, the private party leases or buys an existing facility from a
public agency; invests its own capital to renovate, modernize, and/or expand the facility;
and then operates it under a contract with the public agency. This model is used in
development of air ports.
Sale/Leaseback
This is a financial arrangement in which the owner of a facility sells it to another entity,
and subsequently leases it back from the new owner. An innovative application of the
sale/leaseback technique is the sale of a public facility to a private party for the purposes
of limiting governmental liability under certain statues. Under this arrangement, the
government that sold the facility leases it back and continues to operate it.
Turnkey
Under this model, the government contracts with a private partner to design and build a
complete facility in accordance with specified performance standards. The private partner
commits to build the facility for a fixed price and absorbs the construction risk of meeting
that price commitment. In a turnkey transaction, financing and ownership of the facility
can rest with either the public or private partner.
Why Banks have started financing Infrastructure Projects?
 All India Term Lending Institutions like IDBI, ICICI converting themselves into
Commercial banks, thus exclusivity is lost and other commercial banks entered
the field.
 Source of funds with Infrastructure NBFCs such as PFC, NPC, IRFC, IL&FS, etc,
alone were inadequate to meet huge funds demand for this vital sector.
 Govt with a view to achieve greater economic progress with good speed. floated
multiple infrastructure projects simultaneously, calling for huge funds
requirement.
 Commencing from mid 90s, on account of economic liberalization and financial
disintermediation, liquidity in the banking system for most part of the last 15
years is highly comfortable, driving the banks to scout for lending options for
long time.
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 With infrastructure assuming economic prominence, big industrial houses had set
up huge infrastructure development companies and banks found it convenient to
fund such large industrial houses.
 Compared to manufacturing sector, the demand for bank credit from
infrastructure projects was huge and banks encashed upon this opportunity.
 Income Tax benefits to the banks under Sec 10(23G) of IT Act (withdrawn vide
Finance Bill 2005), i.e. Interest earned by the banks on lending to infrastructure
was exempted from payment of Income Tax.
 Commencing from late 90s, banks have set up robust ALM process, through
which the Liquidity and Interest rate risk is effectively addressed. This has
provided the necessary comfort to the banks to lend aggressively to this sector not
minding the long tenure of the loan.
 With the sector blooming, Loan Syndication emerged as the best mode for
infrastructure funding. This has driven the banks to set up Merchant Banking
Division (like SBI Caps, etc,) to organize Loan Syndication and earn huge
commission for the same and thus boost the fee based income substantially.
Banks exposure to infrastructure lending has grown four fold since March 2005 from 6%
to 9.25% of bank credit in March 2009.
RBI Guidelines: Criteria for financing an Infrastructure Project.
Banks/FIs are free to finance technically feasible, financially viable and bankable projects
undertaken by both public sector and private sector undertakings subject to the following
conditions:
(i)
The amount sanctioned should be within the overall ceiling of the prudential
exposure norms prescribed by RBI for infrastructure financing (20% of the
Bank’s Capital funds to individuals and 50% in the case of finance to a
group).
(ii)
Banks/ FIs should have the requisite expertise for appraising technical
feasibility, financial viability and bankability of projects, with particular
reference to the risk analysis and sensitivity analysis.
(iii)
In respect of projects undertaken by public sector units, term loans may be
sanctioned only for corporate entities (i.e. public sector undertakings
registered under Companies Act or a Corporation established under the
relevant statute). Further, such term loans should not be in lieu of or to
substitute budgetary resources envisaged for the project. It should be ensured
by banks that these loans/investments are not used for financing the budget of
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the State Governments. Banks should undertake due diligence on the viability
and bankability of such projects to ensure that revenue stream from the project
is sufficient to take care of the debt servicing obligations and that the
repayment/servicing of debt is not out of budgetary resources.
What type of facilities provided by banks for Infrastructure Projects?
Normally, banks provide long term loans with the tenor ranging from 7 to 12 or 15 years.
Banks also provide non fund based facilities like Guarantees for participation in the
bidding as also for performance of the contract and LCs for purchase / import of
machinery.
Where projects are completed and the same is in commercial operations, Working capital
facility both fund based and non fund based is provided.
Banks may also lend money for acquisition of the promoter's shares in an existing
company, which is engaged in implementing or operating an infrastructure project in
India subject to certain conditions.
Key Issues in Bank Financing:
01 Long Tenor of the Loan & ALM Mismatches:
Considering the prevailing interest rate volatility in Deposit rates, most of the bank
deposits (around 90%) are short term in nature with a maturity profile of 2 to 3 years.
Therefore, lending long creates a huge maturity mismatch and presents a big challenge to
ALCO of banks for effective and acceptable presentation to the stake holders, in
management of Interest rate risk and Liquidity risk.
02 Reliability of Future Cash Flows of the Project for Repayment.
The typical of a project loan, more precisely an infrastructure lending is that, it is a Cash
flow based lending and NOT Balance Sheet based lending. This essentially leads to
dependency only on the cash flows of the specific project for repayment of a project loan.
To some extent, future cash flows arising from infrastructure projects like Power (on
account of availability of PPA) can be relied upon, but the same thing cannot be said of
Road projects, particularly if it is not under Annuity basis. On account of this uncertainty
in spite of sensitivity analysis, acceptance of long term cash flow projections interalia
Debt Service Coverage Ratio (DSCR) may not be realistic.
03. Security for Infrastructure Loans:
Normally, Project Assets are held as Security for loans. This is practicable and acceptable
in the case of loans resulting in creation of physical assets like Power sector or so.
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In the case of Roads, Bridges and Dams, etc. the Project Assets are not to be treated as
Security for bank loans. Also the rights, licenses, authorizations, etc., charged to the
banks as collateral should not be reckoned as tangible security as per RBI guidelines.
Hence, such advances shall be reckoned as unsecured.
Banks may treat annuities under Build-Operate-Transfer (BOT) model in respect of
road / highway projects and toll collection rights, where there are provisions to
compensate the project sponsor if a certain level of traffic is not achieved, as tangible
securities subject to the condition that banks' right to receive annuities and toll collection
rights is legally enforceable and irrevocable.
The above RBI guidelines clearly spell that long term loans for Road projects are
unsecured unless it is backed by other collateral security, which is a rarity considering the
huge quantum of loan and also the fact that these are developed by Special Purpose
Vehicles (SPVs).
04. Delay in Commercial Operation Date (COD) and Consequential Extension of
Door to Door Tenor of Loan
In Infrastructure projects, the more imminent risk is delay in implementation of the
Project. This is more pronounced in Road projects for acquiring required land and Right
of way. Because of these obvious reasons, the COD gets postponed. Though RBI
guidelines provide cushion time for treating the account as Standard Asset during this
period (upto a maximum of 4 years from the original date of COD), but the connected
repayment will have to be obviously extended resulting in extended Door to Door tenor
of such loans. Such reschedulement of the loan is to be termed as Restructured advances
to be published in the banks’ balance sheet.
Delay in project implementation may take the cash flows for a toss and quantum of
Interest During Construction (IDC) also increases, thus affecting the DSCR or the
repayment itself.
05. Risk Weight for Lending to SPVs
Infrastructure projects are implemented through SPVs. As SPVs are new companies and
the Sponsor distances himself from these SPVs, on a standalone basis, SPVs do not
command the highest rating. In such cases the risk weight for the bank lending is 100%
or more.
06. Prudential Exposure Ceiling for Group Borrowers;
As Sponsors have contributed to the equity of SPV, they are treated as Group companies
of the Sponsors attracting the RBI Prudential exposure ceiling of 50% of the Bank’s
Capital funds. In many cases, bank’s ability to lend is restricted on account of this.
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07. Industry wise- Sector wise Exposure of banks to Infrastructure Projects:
As a prudent credit risk management and to avoid concentration risk, banks prescribe
exposure ceiling to various industries, sectors, activities, etc.
In the case of infrastructure projects, considering the huge funds requirements, that too
for longer durations, generally, only big banks take exposure in infrastructure lending. As
most banks would have fixed exposure ceiling to this sector, the actual exposure is either
exceeded or near about the ceiling, leaving little head room for future lending.
08. Interest Rate Reset
Normally, infrastructure loans carry fixed interest with reset option at the end of each
year or so as agreed upon. Generally, where interest rate reset option is provided, no
prepayment penalty is imposed if the loan is repaid at the time of reset of interest.
Here, depending upon the prevailing interest rate scenario, banks reset the interest and
conveys the same to the borrower. If such reset rate is acceptable, the borrower would
continue or else he would prepay the loan by raising loans (mostly short term) elsewhere.
Thus the borrower always tries to take advantage of interest rate reset and it is not always
win - win for both.
09. Loan Draw downs- Non Availment
Delay in implementation of the project causes irregular draw downs than originally
envisaged resulting in derailment of ALM process and proper policy initiation thereon.
Also, in many occasions where banks are sitting on abundant liquidity, they offer short
term loans to the corporates at competitive rates of interest for managing their temporary
cash flow mismatches. Corporates use such short term loans instead of prescribed draw
down of term loan to acquire the required asset and thus plan to reduce their interest
burden. Thus many a times it may so happen that the loan sanctions to infrastructures are
huge but the availment is comparatively low.
Support to be provided to banks by Government/RBI:
In view of the major role played by banks, the Government and RBI may examine
providing following support to the banks:
 Reintroduction of Section 10(23G) of IT Act
 As a special case, treat the assignment of toll receivables, rights, licenses,
authorizations, etc as security for loans.
 Treat SPVs on the same platform as that of the sponsor for the purpose of Risk
Rating as also the applicable risk weight.
 As project assets, project related contracts and project cash flows are separated to
a large degree from the sponsors and that the sponsors provide limited or no
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recourse to cash flows from other assets, for the purpose of Group exposure, the
lending to Group entity need not be clubbed with the exposure to SPVs.
 To permit the banks to issue tax free infrastructure bonds and treat the same as
part of Tier II capital for Capital Adequacy purpose
 Infrastructure loans to a water supply project, irrigation project, water treatment
system, sanitation and sewerage system or solid waste management system,
renewable energy sources such as wind, biomass, small hydro, solar, etc. projects
for preservation and storage of processed agro-products, perishable goods such as
fruits, vegetables and flowers including testing facilities for quality and Projects
involving agro-processing and supply of inputs to agriculture, irrespective of loan
quantum may be treated as part of priority sector lending.
 RBI/ IDFC/ IIFCL may provide refinance to banks upto a certain percentage of
bank’s infrastructure lending to tide over liquidity constraints and treat that
portion of refinance as short term source (inflow) of funds for bank’s ALM
purpose.
Conclusion:
Funds requirement for Infrastructure projects are huge and banks alone for various
reasons stated above may not be able to fund the massive requirement. In fact, Dr.
Rakesh Mohan Committee report in 1996 itself has recommended for development of
Bond market to fund the huge requirement. PF, LIC and such other funds will have to be
effectively deployed to meet the fund requirement for infrastructure development. Banks
on their part will have to continue to play a major supportive role in growth of this vital
sector, supported by Government/ RBI as stated above.
References:
1. RBI Guidelines
2. Deepak Parekh Committee Report on Infrastructure Financing
3. ICRA Report on Public Private Partnership
4. United States General Accounting Office Glossary on PPP
5. PPP Process – World Bank Institute
6. National Council for Public Private Partnerships
7. http://info.worldbank.org/etools/pppi-portal/docs/events/PPPProcess.pdf
8. http://www.pppinindia.com/
9. http://www.pppindiadatabase.com/
10. Wikipedia
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