 "Impact of RBI decision: More funds for infra firms, at lower costs")
Currently, infrastructure funding leads to asset-liability mismatch for banks, as a bulk of their deposits have maturity periods of two-three years, while infra assets mature in 10-15 years. Infrastructure companies face re-financing risks that expose them to volatility in the interest rate cycle and the macro-economy.
The new provisions will be applicable only to loans sanctioned after Tuesday, when a circular in this regard was issued. Also, the norms rule out relief to companies with existing projects or projects under implementation. Given the stress in the balance sheets of many infra and core sector companies, the number of new projects to be launched to avail of this scheme is uncertain. This might also make earlier projects financially less attractive than new ones.
"Currently, banks find it difficult to raise funds for more than five years but they are funding infrastructure projects that yield returns over 10-15 years or more. This results in asset-liability mismatches for banks, while borrowers face huge re-financing risks," says Deep Narayan Mukherjee, senior director (ratings), India Ratings.
Typically, banks fund projects in the initial years and developers or companies are expected to repay the loans, either through internal accruals or borrowings from other sources, once projects turn operational. This leads to financing woes for infrastructure companies, as their concession periods are in the range of 25-30 years. Within a few years of starting operations, they have to refinance the original debt, which is difficult if the interest rate cycle reverses or the economic environment turns hostile, as was the case through the past three years.
The new norms will help companies in eight infra and core industries - coal, crude oil, natural gas, petroleum refinery products, fertilisers, steel, cement and electricity (generation, transmission and distribution).
"The move, besides extending the tenure for core sector lending, addresses many other aspects, such as lowering the cost of funds, simplifying refinancing, flexibility for managing project delays and pricing," says Kameswara Rao (energy and utilities head), PricewaterhouseCoopers. He adds sector-specific policies and regulatory changes are necessary for infrastructure projects to turn viable and attract long-term domestic and foreign financing, especially the equity component.
Kartik Srinivasan, co-head (financial sector ratings), Icra, says, "Banks will no longer have to load the cost of SLR (statutory liquidity ratio) and CRR (cash reserve ratio) provision on borrowers, translating into lower funding costs. Banks could choose to pass the benefits fully or share it, depending on the project or the credit profile of borrowers."
It is likely the new norms will reduce funding costs 50-100 basis points, says Ashok Bhandari, chief financial officer of Shree Cement. "We no longer have to bear the burden of funding CRR and SLR, which account for as much as 40 per cent of assets," he adds.
Ajit Gulabchand, chairman of Hindustan Construction Company, says, "Any relaxation is welcome. It must go all the way to encourage lending and restructuring, as done elsewhere."