Mumbai: As big-ticket public works projects, including power plants and highways, languish because of regulatory delays, land acquisition hurdles and lack of funding in the face of slower economic growth, infrastructure financiers are seeking to diversify their revenue streams.
IDFC Ltd, for instance, is adopting a tightfisted approach towards borrowers in the infrastructure sector while attempting to move into commercial banking.
IDFC has significantly cut down infrastructure project financing because of the uncertainty the sector faces, said Vikram Limaye, managing director and chief executive officer. The company has started putting in place tighter controls to ensure that infrastructure project promoters have necessary approvals and contracts in hand.
“Historically, the infrastructure sector has assured secular growth story, given the shortfall in the country’s infrastructure. But it is no more secular,” Limaye said.
“Although we may be getting an average return of 20%, we cannot count on infrastructure for steady growth,” he said. “There may be three years of 0% returns and three years of 40% returns. We have no control on the destiny of the projects.”
Delays in securing environment clearances, land acquisitions approvals and poor demand forecasts have stalled many infrastructure projects in recent years, hurting the cash flows of their promoters. Finance minister P. Chidambaram said in June that as many as 215 projects with an investment of Rs.7 trillion are stalled.
As many as 103 central government infrastructure projects costing more than Rs.150 crore each have been delayed by four to 20 years, according to data compiled by the ministry of statistics and programme implementation until March.
Limaye said the non-infrastructure businesses of IDFC posed fewer risks. IDFC offers project finance and private-equity funding for infrastructure projects apart from other services like equity broking and investment banking. The non-banking financial company has applied for a commercial banking licence in order to diversify its lending base and hedge exposure to the infrastructure sector.
“At present, we can only lend to infrastructure sector. Now, we can only offer term loan products, but banking will allow us to serve infrastructure sector better on product perspective and lend to other sectors as well,” Limaye said.
In the infrastructure sector, IDFC has adopted the so-called Equator Principles framework that helps it determine, assess and manage environmental and social risks in projects; it serves as a minimum standard for due diligence of public works projects. Risk assessment is done by a third party, based on the International Financial Corp.’s performance standards on social and environmental sustainability.
“In the last 18-24 months, about 40 roads projects have come for bidding and we have supported just one,” said Limaye.
Such stringent controls have helped limit IDFC’s non-performing assets ratio to 0.15% of total loans compared with the banking industry average of 3.4%. IDFC is not the only firm going slow on backing infrastructure projects. Some private equity funds are also being cautious about investing in the sector and seeking structured deals to curtail potential losses.
“In several deals, we are employing a stop-loss mechanism now,” said Suresh Goyal, chief executive at SBI Macquarie Infrastructure fund, which has invested in road projects.
“Right now the valuations are reasonable and since the road projects we have invested in are already operational, our returns are secure,” said Goyal.
Another PE firm, 3i Group Plc, will be exiting from all infrastructure projects in India. The firm had announced its plans to pull out in May. 3i India Fund had invested around $875 million in seven firms but hasn’t been able to exit a single one in six years.
PE investment in the infrastructure space has also seen a significant dip. In 2010, about 56 private investment deals worth $3.1 billion were signed in the infrastructure space compared with 30 deals worth $851 million in all of 2012, according to researcher VCCEdge.
Like IDFC, Srei Infrastructure Finance Ltd is seeking a commercial banking licence.
“Keeping in mind the current scenario, we have deliberately decided to go slow on the project financing front,” said Hemant Kanoria, chairman and managing director, Srei. “Our focus has been on protecting profitability through risk mitigation, close monitoring of our portfolio and working closely with our customers so that we are able to address their issues,
Kanoria said that starting a bank will reduce the cost of funds, which would be a “major contribution to the bottom line.”