Role of Indian Commercial banks in Infrastructure Finance

Commercial banks in India have long assumed an important role in funding infrastructure SPV’s but had their exposures limited on account of asset liability mismatch, narrowing interest margins, inadequate capital and redistribution of risk associated to other funding entities. The problem is more profound at the initial underwriting stages were banks lack the expertise of evaluating the underlying technical and financial  risks that are usually associated with such long term projects. Regulatory norms like ceiling on exposures and provision of a higher capital have forced banks to limit their contribution to such social cause as infrastructure development. Also, absence of an organised securitisation mechanism where a bank’s balance sheet exposure on infrastructure can be converted to paper based securities aggravate the systemic risks involved.

Despite such impediments, commercial banks have pioneered the cause of infrastructure financing in one way or the other. Most Banks have smartly diversified its role from being a fund provider to pure advisory services. Today most banks have hired industry and economic experts to form a distinct Line of business of providing consultancy to infrastructure projects. Besides pure advisory income, banks too are playing a major role in intermediation to arrange funds from third party lenders, for a fee. A growing expertise in evaluating projects has given banks the much needed confidence to step into the shoes of a guarantor for such projects as well.As for direct financing, banks have for long been proactively engaged with our countries policy makers to mull on initiatives to make infrastructure financing a cheaper and viable option. It was not until the union budget of 2009-10, that the ruling government finally announced the setup of IIFCL (or India Infrastructure Finance Company Ltd) for providing long term financial assistance to infrastructure projects. The key point that came out of this budget was to empower IIFCL to help commercial banks in effectively addressing asset-liability mismatch arising out of financing infrastructure projects, by resorting to means as ‘takeout financing’. The scheme which was officially named “Takeout Finance Scheme for financing viable infrastructure projects’ came into force from 16th April,2010. Since then 'takeout financing' has emerged as a potent weapon for banks to unlock it’s capital and participate more and more into infrastructure financing activities. As per the 11th five year plan (2007-2012), the funding requirement for infrastructure had been estimated at USD 514 billion. As banks, NBFCs and FI’s join hands with infrastructure refinance Institutionsto Bridge the funding gap, the dream can only be realised if our policy makers and private institutions come together under the aegis of the much popular PPP model for creating more infrastructure projects in the country.