IIFCL seeks panel for more bank funding

'Putting individual exposure to SPV projects under group exposure norms hurting banks' ability to lend.'

India Infrastructure Finance Company (IIFCL), the apex financial intermediary for infrastructure projects, has suggested setting up of an expert committee to address the banks' concerns over enhancing exposure to the infrastructure sector.

The suggestion comes in the wake of the Reserve Bank of India's (RBI's) reluctance to relax group exposure norms for banks that are financing infrastructure projects through the special purpose vehicle (SPV) route, something which has been recommended by the Deepak Parekh committee on infrastructure financing.

At present, the exposure ceiling is 40 per cent of the capital funds of a bank in case of a borrower group.

However, the credit exposure to borrowers belonging to a group may exceed the limit by an additional 10 per cent (or up to 50 per cent) provided the additional exposure is for infrastructure projects.

However, IIFCL has said the limit is affecting the banks' capacity to lend to infrastructure projects. It says there may be 25-30 large groups participating in infrastructure projects that are already availing of credit from the banking system for other activities.

Special norms are needed where projects are developed under a public-private partnership mode on a non-recourse basis, IIFCL has said.

Inclusion of the exposure to individual projects on a non-recourse basis under group exposure is likely to have an adverse impact on the overall financial closure of projects, it has argued.

The RBI is also not in favour of relaxing the norms that classify project loans as sub-standard if commercial operations do not start within one year from the scheduled date even if loans are being serviced timely.

Keeping in mind the huge funds needed in the power and port sectors and for the freight corridor, a number of SPVs where lending is on a non-recourse basis are being contemplated.

The outstanding credit of the banking system was Rs 1,08,787 crore on March, 2006, 7.19 per cent of total advances. The share of bank lending is estimated to have been increased to 9 per cent of the total advances by March 2007.

In a representation to the finance ministry, IIFCL said a committee could be appointed on the lines of the Tandon Committee to resolve such issues to increase bank lending to infrastructure projects.

The Tandon Committee report suggested a shift from "security-based" to "need based" approach to bank credit. IIFCL said the proposed committee should also suggest how to strengthen the appraisal mechanism of banks to minimise the risks in such projects.

"The finance ministry is examining the suggestion," an official source said. Out of $475 billion required for the infrastructure sector over the next five years, around 70 per cent is projected to come in the form of debt.