IDFC sounds warning bell on core sector funding

Fund-flushed banks are taking high risks as they fund five-year infrastructure projects at six per cent interest.

In the wake of aggressive pricing of infrastructure projects, banks have failed to price in the credit risk adequately, Infrastructure Development Finance Company (IDFC) managing director & CEO Nasser Munjee said.

"Project financing is a new type of risk which has not been tested for long. Hence, some financiers have neither judged the maturity process nor have they taken cognisance of the various project-related risks," he pointed out.

Risk-based pricing is being evolved in private sector banks, said Leo Puri, principal at McKinsey & Co, adding: "I have not seen it in public sector banks."

He was speaking at the recent Bank Economists' Conference 2003 in Mumbai. Infrastructure funding organisations like IDFC have lost business to more aggressive competitors. The Bangalore airport project is one of the projects IDFC lost out to ICICI Bank.

The country's largest private sector bank has a "big cheque book" and can underwrite large-sized projects as well as undertake syndication, said Munjee.

"My concern is that the credit risk is not being priced adequately, especially in the case of pure project finance deals. In the current highly liquid market, borrowers are negotiating aggressively as there is competition for financing good projects," said Munjee.

IDFC was forced to drop out of the race to fund a number of projects when it could not match the low rate of interest offered by aggressive banks, based on their cost of funds.

Some infrastructure projects are being funded at as low an interest rate as six per cent, said Munjee. Today the corresponding five-year government security paper is quoting at 4.77 per cent.

A differential of 123 basis points between a five-year infrastructure loan and a no-risk government paper does not take into account the policy risk, cash flow risk, legal and contractual risk.

At the same time, IDFC has bagged a number of projects and has seen its sanctions and disbursements soar by 230 per cent and 95 per cent respectively in the first half of fiscal 2004.

"There are however, not enough bankable infrastructure projects, and the government has to learn to let go," said Munjee.

IDFC hopes to grow its sanctions book further, but Munjee adds that today's prudential limits and company limits confine the corporation's ability to write more business.

"I am only in the infrastructure space and do not have a balance sheet size as that of ICICI Bank," he added.