Rating agency Crisil today said the Indian banking system can increase its funding capacity to the infrastructure sector by Rs 1 trillion over the next four years without impacting asset-liability profiles.
This can be done by refinancing of infrastructure project loans through debt capital markets, it says. This amount is nearly a fifth of the banking system’s total exposure to infrastructure. For this to happen, the banking sector needs to make two fundamental changes in its lending approach to infrastructure, says a Crisil report.
According to Ramraj Pai, director–Crisil Ratings: “First, banks should adopt a model of originate, carry, and refinance for their loans to infrastructure projects, against the current model of originate and hold.” Second, banks need to evolve their pricing strategy for such loans to make it more risk-based, he added.
Under the new model, banks will originate project loans and then carry these for only the initial three to four years till the project is constructed, commissioned, and stabilised. The banks should then encourage refinancing these loans through the bond market to a new set of investors, who have a longer-term investment horizon and capacity.
Clear benefits exist for other stakeholders as well, says the report. "The bond investors, who prefer lower risk assets, can be assured of a regular flow of quality, long-term duration investment options," Crisil added.
"Infrastructure developers will benefit from the continued funding availability for their existing and new projects, without the constraint of group exposure norms. The returns on their operational projects can also improve because of lower refinancing costs. More, the fixed-rate nature of the bonds offsets the interest-rate risk inherent in bank loans," it adds.