New Delhi: Multilateral and bilateral financial agencies could again be lenders of choice for infrastructure developers in India as credit from foreign commercial banks and bond markets tightens, say experts.
Long-term plans: The Centre expects to spend Rs20 trillion within five years on core projects such as power plants and their networks. Harikrishna Katragadda / Mint
“Now, with the (global financial) crisis, we are seeing an increase in the requests,” said Christian Haas, director of KfW Entwicklungsbank’s India office. KfW operates the bilateral Indo-German Bilateral Development Corporation, which funds projects referred to it by the finance ministry’s department of economic affairs. “There is stronger demand but we cannot meet it,” Haas said.
Multilateral finance institutions, which traditionally finance big infrastructure projects, were given a pass in the recent boom before the credit crisis hit financial markets, but that will change now, said Nicholas Vix, who heads the project and structured finance operations for the Asia-Pacific region at diversified French banking group Credit Agricole SA.
“I guess that the main reason for borrowers to go to commercial banks rather than multilaterals is the perception that the former are faster and more reactive, whereas the administrative processes followed by the latter tend to be more time-consuming,” Vix said, adding that there was no clear-cut cost advantage on either side.
Institutions such as the World Bank and the Asian Development Bank (ADB), are cushioned against the global crisis to an extent because they raise money from their member countries and supplement them by raising money from bond markets.
The International Finance Corp. (IFC), the World Bank’s private lending arm, for example, has 179 member nations who together contribute some $2.7 billion (Rs12,879 crore) to its corpus, while the ADB is owned and financed by 67 member countries. They also borrow from bond markets at low rates because of their higher credit ratings.
The Indian government, which wants to boost its infrastructure spending ahead of next year’s general election, expects at least Rs20 trillion in infrastructure investments in the next five years.
In August this year, India’s Planning Commission estimated total debt requirement in infrastructure for the five years to March 2011 would be some Rs9.8 trillion, while pegging credit availability at only Rs8.2 trillion.
Typically, 70% of the cost of infrastructure projects is financed through borrowings and the rest through equity.
Currently, domestic banks fund most of India’s infrastructure debt requirements, with some estimates saying Rs4,23,691 crore would be available as local bank credit in the next five years.
Companies cannot directly borrow from most bilateral and multilateral lenders, and often have to get proposals cleared from government agencies such as the department of economic affairs.
Some, such as ADB and the World Bank, have private lending arms. They also route their loans through domestic lending institutions such as the India Infrastructure Finance Co. Ltd, which then lend to companies.
“IFC has always been a preferred lender for infrastructure as typically infrastructure needs long-term funds...infrastructure is a priority for us in India and the South Asian region,” said Vipul Bhagat, manager, infrastructure advisory, IFC. “In the current scenario with tight liquidity conditions, multilaterals such as IFC have an even more critical role to play.”
On his part, J. Sridharan, director, finance, Power Grid Corp. of India Ltd, the country’s largest state-owned power transmission company, said, “We had done a smart thing by availing of loans from the World Bank and ADB as in the present situation, raising credit may be a bit tough.”
Utpal Bhaskar contributed to this story.