Bankers count on India budget to pave way for more infra financing
Banks are lining up to lend to a high profile airport project in India, putting the spotlight once again on the country's infrastructure financing needs. The hype surrounding that scheme is far from typical, as delays and undeveloped capital markets largely keep foreign investors away. Bankers are hoping this weekend’s budget will change that, writes Shruti Chaturvedi.
India's woeful lack of infrastructure development is a frequently identified problem for the country, particularly bureaucratic delays that can lead to projects becoming unviable.
Now, with Indian lenders facing rising non-performing assets (NPAs) — due in large part to debt raised by the infrastructure sector and increasing the need for foreign capital — market observers are counting on the new Indian government to address these problems in its first full budget on February 28.
This will not be easy. India has seen an extremely inconsistent flow of foreign capital into infrastructure project funding.
G3 currency lending volume to Indian infrastructure related projects in 2014 was $386m from three deals, according to Dealogic. While this was a leap from the $178m of project loans seen in 2013, it was still lower than the $414m of deals in 2012 and a small fraction of the $3.8bn completed in 2011.
But despite the general wariness of international and local lenders towards infrastructure projects in the country, one opportunity that has got them excited is a $2.2bn project for Navi Mumbai Airport.
Four bidders are in the race for the project — GMR Delhi, MIA Infrastructure with Tata Realty, Mumbai International Airport, and Zurich Airport with Hiranandani Developers.
The presence of international operators such as MIA Infrastructure, which has a French promoter, is attracting international as well as domestic banks with expertise in project financing. Another incentive is the "share till" format that the project is offering, which gives developers access to the non-aeronautical revenues of the airport.
“While constructing, it’s better [for developers] to have bank debt because you can draw down as you want to,” said a banker at a French lender.
But the enthusiasm of overseas lenders for the Navi Mumbai project is certainly not representative of their general view on the Indian infrastructure space. For a start, the risks associated with backing infrastructure projects in India mean that lenders generally seek some sort of government backing.
“When you’re talking about infrastructure in India, who should fund? Banks or developmental agencies?” said a banker at an overseas subsidiary of an Indian lender.
“Banks typically should work on short term funding. With infrastructure, you’re talking about tenors of seven-plus years. That should come from a dedicated agency. The [Indian infrastructure fund] IDFC has a role, but it can hardly cover 8%-10% of what is required.”
In his opinion, banks should come in with bridges that should be taken out with longer dated debt. But due to the still-developing nature of India’s financial markets, there is uncertainty surrounding takeouts, which has hit domestic banks in the form of NPAs.
“The NPAs are because of the infrastructure sector," he said. "There is an asset liability mismatch. You have deposits at two to three years or five years, whereas these loans are typically seven years or over."
A February paper by independent Indian credit agency ICRA that analysed the performance of 26 public sector and 16 private sector banks in the country said their gross NPAs increased to 4.5% as of December 31, 2014, from 4.2% as of September 30.
With local banks struggling to provide funds, there is a need for more foreign capital. As a result some bankers are now pinning their hopes on this weekend’s budget from the Narendra Modi-led government to provide a boost to the sector.
Top of bankers' wishlists is the introduction of more infrastructure funds and development agencies to provide guarantees that offer lenders comfort against political and other risks.
“Funding alternatives being thought of include credit enhancements from specialised parties and infrastructure debt funds,” said an India-based banker at an international lender.