Mumbai: The government-owned India Infrastructure Finance Co. Ltd, or IIFCL, is set to play a larger role in infrastructure financing in India with finance minister Pranab Mukherjee allowing the company to get into take-out financing and refinancing 60% of bank loans given to projects developed by public-private participation. Under take-out financing, an institution buys out long-term project loans after a few years of disbursements of such loans.
In an interview, S.S. Kohli, chairman and managing director of IIFCL, outlines the road map for the infrastructure finance company. Edited excepts:
In the past, State Bank of India and Infrastructure Development Finance Co. Ltd (IDFC) tried to experiment with take-out financing but did not succeed. Will IIFCL be able to do this?
The problem with the banks is that they have got short-term resources and India’s infrastructure needs long-term funding. Take-out financing is one of the sources of funding for the infrastructure projects as banks may not be comfortable in lending long-term and some of them may have a higher exposure to a project than what the regulations stipulate. They can now get out of that account and keep the exposure within the regulatory limit.
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I agree with you that the earlier scheme was not successful. That’s why the finance minister has announced that the scheme will evolve in consultation with banks. This will make the scheme meaningful and give the desired comfort to banks as well as IIFCL.
What are the problems? Why didn’t it take off in the past?
The problem is, as per the norms of the Reserve Bank of India, you have to provide capital adequacy, if it’s an unconditional take-out. If it’s a conditional take-out, then norms are different. I think that could be one of the reasons why the norm could not be successful. May be that these norms have to be revisited.
Long-term funding: IIFCL chairman S.S. Kohli says take-out financing is one of the sources of funding for the infrastructure projects as banks may not be comfortable in lending for longer duration.
You will need to refinance 60% of the entire Indian banking system’s exposure to infrastructure. Where will the money come from?
Under the government’s first stimulus package, we were asked to raise Rs10,000 crore by way of tax-free bonds by March 2009. That money has been lying with us. Once this is used, we can raise more money.
At what price will this refinancing take place?
We have raised the first tranche at 6.85%. We will give refinance to the banks at 7.85% and they will not charge more than 10.35% to their borrowers. For the second tranche, the cost of money will depend on interest rates which are market determined.
Will Rs10,000 crore be enough for 2010?
Our estimate is that this will be used this fiscal and we will ask the government to allow us to raise another Rs10,000 crore from the market which can be used later.
How are you planning to generate resources? Your plan to raise $1.2 billion (around Rs5,850 crore) from the World Bank has got stuck.
There are some issues with the World Bank loan but that should be resolved. The Asian Development Bank has already sanctioned a loan of $500 million, out of which $200 million has already been raised and another $300 million will come in the next three-four months. They are again going to their board to sanction another $700 million in September, and part of these funds will be available this year.
KfW (Entwicklungsbank) has also given a principal sanction of €184 million (around Rs1,250 crore) and the documentation (for this loan) is being finalized.
Besides, we can also raise funds locally against the government guarantee. We are also looking at the option of raising funds through ECB (external commercial borrowings), but at present overseas money is costlier than domestic funding.
There was also a plan as to use the country’s foreign exchange resources and up to $5 billion is at your disposal. Are you using the money?
We opened our UK subsidiary in April 2008 for this purpose. The company has already sanctioned loans to nine projects and our commitment of UK subsidiary is about $1.5 billion against a project cost of $14 billion. The total $5 billion could be used in the next three years. We plan to raise to $250 million in each tranche from the Reserve Bank. One such tranche has been raised and the target is to raise two more this year.
Where is IIFCL now in terms of infrastructure financing?
We received more than 200 proposals since the launch of this company. Along with a few funds in which we have participated, IIFCL has overall sanctioned loans to about 106 projects. We do not fund irrigation and telecommunication projects and those that ask for less than 10-year loans.
On our own, we have sanctioned loans to 86 projects and financial closure have been achieved in 83 projects. Out of 86 cases that we have sanctioned, 57 relate to highways that cover about 3,800km, 21 are power projects, slated to generate about 21,000MW. Besides, there are five ports that would handle about 46 million tonnes of cargo and two airports—in Delhi and Mumbai—handling 45% of air traffic in India. There are 21 urban infrastructure projects. Out of 57 highways, nine have already been completed and eight are on the verge of completion.
How much money have you disbursed?
We have disbursed about Rs5,700 crore so far. We had disbursed Rs3,200 crore last year and our disbursement target this year is about Rs6,000 crore. And this is outside refinancing bank loans.
So you will cross Rs10,000 crore this year. And you have 15 people working with you.
We had 23 and we have recruited six MBAs this year.
We have employed an HRD consultant to assess the manpower requirement of the company. We would need 25 people this year and another 10 next year.
You are not regulated by anybody. How are you taking care of the risk in lending?
The company, with the approval of the board, is complying with the prudential norm of the Reserve Bank. This means we are going with the 90-days norm for NPA (non-performing assets) and making 0.40% provisions for standard assets. We are recovering interests on a monthly basis. For most of the loans, we have recovered interest till May and in most cases even interest up to June has been recovered.
Although we go by the (project) appraisal of the lead bank, we have a risk-management system in place and only those cases are sanctioned that conform to our internal rating for sanction. Each and every proposal has to pass through the risk-management system, developed in consultation with Crisil (Credit Rating Information Services of India Ltd).
We have also done the rating of our existing cases and all meet the risk-rating standard of IIFCL. At present it’s a zero NPA book.
Are you apprehensive that asset quality can deteriorate in the future?
Infrastructure funding is long-term funding and the assumptions are very huge compared with lending to industry or wholesale trade. Moreover, you must have proper support from the state governments for acquisition of lands, etc. So far, 85% of the projects are going as per schedule. Out of 86 cases for which we have sanctioned money, 70 are in public-private partnership (PPP). We are sending our officials regularly on sites to ascertain that all terms and conditions of lending are adhered to. I think the progress is quite satisfactory. If there is (an) alarm signal, corrective actions would be taken immediately.
IDFC was set up in the late 1990s with the sole purpose of financing infrastructure projects in India. How is IIFCL different from IDFC?
IDFC is doing a good job as far as infrastructure financing is concerned, but it is lending to the private sector. IIFCL has been formed to lend to the public sector. PPP is an overriding priority and only 20% of the sanction could be given to the private sector. So our emphasis is on PPP (projects) and if India has to develop its infrastructure, public-private partnership is going to be a model for development... The public sector can develop a facilitating platform for completion of these projects. Even the World Bank says, in past three years, we have (had) more PPP projects than what we had in last 10 years, in terms of amount, and this is going to be a successful model.
You are doubling your exposure every year. Where do you see IIFCL in the next five years?
IIFCL India and IIFCL UK should be funding Rs1,00,000 crore (Rs1 trillion) in the next five years.