India Infrastructure Finance Co. Ltd’s (IIFCL) proposal of treating a bank’s lending as a special purpose vehicle (SPV) for infrastructure outside the group exposure norms has not found favour with the banking regulator, the Reserve Bank of India (RBI).
According to RBI exposure norms, credit exposure to a single borrower is limited to 15% of a bank’s capital net worth. For an industrial group, the figure is 40%. A bank’s net worth consists of its equity funds as well as reserves. In case of loans to the infrastructure sector, a bank is allowed to increase its exposure to a corporation to 20% of its net worth and 50% to a group borrower. In exceptional circumstances, commercial banks, with the approval of their boards, can even extend he exposure by another 5%.
IIFCL, in a recent presentation made to the ministry of finance, has proposed that banks’ loans to infrastructure should be kept out of the group exposure limit. IIFCL itself is an SVP, wholly owned by the Union government. It was created to promote the development of infrastructure such as roads, ports and power projects.
A government officer close to the development, who did not wish to be identified, said, “IIFCL is a government-owned financial intermediary and cannot participate in any and every commercial projects. The capital base of this SPV is much smaller than that of banks. This is why IIFCL cannot be compared with other corporations. In the case of IIFCL, banks should not go by the exposure norms.” IIFCL has a capital base of Rs1,000 crore.
RBI says the concept of the “group” and the task of identification of borrowers should be left to banks, because they have the best knowledge of their own clientele and their exposure to risky assets. The central bank justified that SPVs such as the ones set up for implementing infrastructure projects will continue to be treated as a part of the group because most parents of SPVs have a controlling stake in them and cannot be treated as separate from the SPV.
IIFCL is not ready to accept the central bank’s view. In a 27 July letter to the finance ministry, it said group exposure norms are suitable for implementation in respect of funding of industry and other projects but financing infrastructure sector needs special dispensation. The letter also sates that infrastructure projects may suffer delay for want of funds because banks will be bound under the group exposure norms and will be unable to lend to individual SPVs.
IIFCL says a committee must be constituted to minimise the risks banks face while lending to infrastructure projects.
It has indicated that the committee may have representation from the Centre, RBI, the State Bank of India (SBI) and a few other large public sector banks, and private sector lenders such as ICICI Bank and Axis Bank.
IIFCL follows a public-private partnership model for financing infrastructure projects. In this model, long-term debt is raised by IIFCL, and equity is brought in by either private equity partners or promoters of the project.
Over the past few months, Citigroup, along with Infrastructure Development and Finance Corp. (IDFC) and private equity fund The Blackstone Group have joined hands with IIFCL to create a $5 billion (Rs20,350 crore) fund called Infrastructure Financing Initiative.