State-owned NTPC has approached the loan market under track II of RBI’s framework on external borrowings. Under the regulations, unhedged international loans by non-bank financial companies (NBFCs) and infrastructure firms must have a tenor of at least 10 years.
NTPC is looking for up to $300m, sending out a request for proposals this month. The average maturity of its fundraising will be 10 years and the door-to-door life around 14 years.
It has certainly set its sights on an ambitious tenor, but NTPC should temper its expectations for the banks' response.
There is good reason for this. Power Finance, also state-owned, issued an RFP for a $100m-equivalent 10 year euro loan in March — the first to brave the market after RBI’s guidelines came into force at the end of last year. At the time, market participants were bullish on the ability and willingness of banks to underwrite commercial loans for such long tenors.
But it wasn’t long before the market realised that bullishness was misplaced. No lender submitted a bid for the Power Finance RFP, despite the deal not being bogged down by scepticism around the tenor.
The fact remains that, while opportunities to deploy capital in quality Indian assets remain scarce, for a lot of banks the idea of commercial loans beyond the seven year mark is hard to swallow, and NTPC could struggle because of that.
It also looks unlikely that the RBI will budge on the issue of minimum maturities for foreign currency debt by infrastructure firms.
The central bank's tough stance has led to speculation that it may be aware of how hard it can be for companies to access foreign liquidity under the new requirements. So its objective may be to curb these companies from amassing exposure to foreign exchange risks by way of external borrowings.
With Indian lenders stung by ballooning non-performing assets in the country’s infrastructure segment, the RBI’s position of enforcing prudence makes sense.
Clearly, if there is no market among foreign lenders for 10 year lending to infrastructure financiers, it would push firms to look at other avenues for raising funds or rethink whether they need to borrow in the first place.
Of course, there is always a possibility that foreign banks, say from Japan, that have experience in long-term lending to Indian entities through the likes of project financing, may be keen on NTPC.
Another group of investors that could chip in are multilateral or export credit agencies. At up to $300m, NTPC needs less than a handful of takers to push the loan through. Even if it does manage to mandate lenders for it, bankers don’t expect the structure to lend itself naturally to syndication, so bidders would have to take and hold their positions.
Admittedly, it’s still early days given NTPC’s RFP was only sent out this month. But if the past is anything to go by, it won’t hurt to tone down any expectations.