When an economy isn't buoyant, the only area one can look for registering a quantum jump is bad debts, euphemistically called non-performing assets (NPA). From Rs 56,000 crore in 2008 to the present estimated Rs 1,50,000 crore, NPA of such gargantuan proportions is indeed a concern, as much for policymakers as for banks and financial institutions. The villain of the piece is reportedly infrastructure and priority sector lending, with power projects in the infrastructure segment leading the pack in defaults, admittedly not entirely due to its own fault.
The 12th Plan estimates that investments of the order of US $1 trillion would be required in infrastructure projects during the next five years. Thus, there is no shying away from infrastructure financing, put off by the gloomy prospects of recovery of loans and collection of interests. Instead, accent should be on improving the lot of lenders, even while being considerate to the unique requirements of infrastructure projects.
Takeout financing, properly tweaked, could be a solution. Conceptually, it means relay lending, as it were. Bank A lends first for, say, three years, with Bank B relieving Bank A thereafter, and Bank C stepping in at the end of the sixth year, and so on, till the completion of the term loan, that would usually coincide with the project picking up momentum after going on-stream.
The idea in infrastructure lending is typically long-term, in view of the long gestation period, whereas commercial banks typically don't lend long-term, lest asset-liability mismatch (ALM), the nightmare of any banker, is created. Relay lending or takeout financing offers the via media. To be sure, this by itself may not improve the fortunes of the relay lenders, but at least there is a sharing of risks and burden, a la its variant syndicated loans.
India Infrastructure Finance Company Ltd (IIFCL) has been encouraging banks to extend infrastructure loans on the promise of picking up the baton later on. The government has heeded the IIFCL's and banks' plea to remove some of the irritants. As it is, IIFCL steps into the scene only after the project has gone commercial, that is, after the commercial operation date, which can vary from project to project, leading to uncertainty and risk. The government has, therefore, wisely relented and agreed to the offloading of the loan onto IIFCL, anytime in the case of road projects, and after six months of the loan in case of other projects. While this is some improvement, it doesn't address the core of the problem.
INFRASTRUCTURE PROJECTS
Commercial banks aren't ideally suited to evaluate infrastructure projects. Relying upon rating agencies isn't wise either, given the performance record of rating agencies globally, including India. Infrastructure financing companies like IIFCL, IDFC, and so on, must be mandated to appraise the loan applications. In other words, instead of calling upon commercial banks to appraise infrastructure loan applications, the job must be thrust upon the specialists who must kickstart the process of lending, by being the first ones to take exposure. Thereafter, the process of relay lending can start, with the final runner being an infrastructure funding specialist.
In a relay race too, the first and last laps are run by the best, with the middle laps being run by others. Banks are ideally suited to run the middle laps that spare them the agony of NPA and loan appraisal but enable them to pitch in with their money and partake in the nation-building process. The existing model, on the other hand, leaves the demanding job of project appraisal to banks. The 0.3 per cent incentive offered by IIFCL, for example, to banks, to part with a loan portfolio, should instead be spent on a robust loan appraisal.
There is no harm if a clutch of banks volunteer to run the middle laps as long as their flanks are covered by an infrastructure lending institution. This will ease considerably the pressure on long-term finances the country is otherwise likely to face, given the fact that commercial banks are flush with funds, but are scouting for lending opportunities.
The present dispensation allows institutions like IIFCL to cherry pick while condemning banks to the agony of loan appraisal, bad debts, ALM and so on. The government must step in to tweak the takeaway financing regime in which commercial banks figure at best as partners.