The International Finance Corp. (IFC) said funding for India, its biggest recipient, will surpass last fiscal year’s record $1 billion (Rs4,600 crore then) as interest rates at a five-year high deter companies from borrowing at home.
IFC will commit $500 million of the funds in the year ended 30 June to infrastructure, focusing on oil, transportation, and power and gas projects, Anita George, chief investment officer of the World Bank arm that lends to companies, said.
“One advantage that we have is our debt financing is very well suited for infrastructure projects, which need long-tenure rupee financing,” George said in an interview in New Delhi last week. “More and more infrastructure companies are coming to us as we offer fixed rate loans for 10 years to 15 years.”
Seven rate increases in India since October 2005 have raised the cost of financing power units, ports and airports, making it harder for the government to remove bottlenecks it estimates shave 2 percentage points off economic growth. State Bank of India (SBI), the nation’s biggest lender, and its peers typically adjust rates every couple of years during the lifetime of a loan.
“In the scenario where rates are rising, there is always the possibility of rates being revised higher, raising our borrowing costs,” said V. Ramakrishna, chief financial officer at Ocean Sparkle Ltd. The Hyderabad-based developer of port infrastructure borrowed $25.6 million from IFC last fiscal year.
Funds planned by IFC, Blackstone Group Holdings Lp., Citigroup Inc. and 3i Group Plc. may help the government of Prime Minister Manmohan Singh raise the $475 billion it estimates India needs to build roads, railways and power stations by 2012. Indian ports take 10 times longer to unload cargo than in Hong Kong or Singapore and a 13% power shortage during peak hours forces companies to have their own power plants.
Fixed borrowing costs helped IFC almost triple loans to companies to $857 million last fiscal year from $287 million, while equity investments rose 24% to $142 million.
IFC’s interest rate on eight- to 10-year loans is about 10% and may vary, depending on the firm’s credit rating and the project profile, said George.
SBI charges 11.75% to 12.75% interest on 10-year to 15-year loans, said Narsimha Rao, general manager with the lender in Mumbai, without naming the borrowers. Rates are adjusted every two or three years, he said.
“I know of cases where my customers have closed the loans when their interest rates went up by as much as 300 basis points on rescheduling rates due to reset clause,” said Rao. A basis point is 0.01 percentage point.
IFC, which has provided loans to companies such as Hero Honda Motors Ltd and Mahindra & Mahindra Ltd, more than doubled funding in India last fiscal year from $402 million in the previous year.
The World Bank arm committed $300 million to infrastructure projects, including a loan of $83.2 million for Gujarat State Petronet Ltd to fund an oil and gas pipeline. It also acquired an $8 million stake in Lanco Power, a unit of Lanco Infratech Ltd, and extended a $33 million loan to MSPL Ltd, a mining company.
“I am very bullish on infrastructure,” said George. IFC’s investments will “support the government’s agenda of addressing infrastructure gaps”.