IIFCL asks RBI to increase loan repayment period for infra projects

March 12, 2014

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The infrastructure finance company has proposed to allow repayments of loans over 25-30 years

Remya Nair

IIFCL asks RBI to increase loan repayment period for infra projects

IDFs will refinance the existing debt of infrastructure companies, freeing up funds of banks for lending to new projects. Photo: Mint

New Delhi: India Infrastructure Finance Co. Ltd (IIFCL) has approached the Reserve Bank of India (RBI) with a proposal to increase the loan repayment period for infrastructure projects, especially road projects, to make them more viable.

The infrastructure finance company has proposed to allow repayments of loans over 25-30 years, compared with the current 10 years, to lessen the pressure on project developers who face fluctuations in cash flows.

“Project financing is slowing. It will soon come to a dead end. There is a need to extend the economic life of an asset so that the project becomes viable for promoters,” said S.B. Nayar, chairman and managing director of IIFCL, which has presented an approach paper to RBI on this issue.

The proposal was also discussed at a meeting of executives of state-run banks and financial institutions with the finance minister last week.

“When you have large projects and there is 75:25 debt-to-equity, it is impossible for the developers to pay back the loans in the next eight to 10 years,” he said.

Along with giving surplus in the hands of promoters, better private equity valuations for the project and lower user charges like tolls for projects, the risk for banks will also lessen, encouraging them to lend to this sector.

Banks are now the main source of funding for these projects.

Asset-liability mismatches and loan exposure limits to industries set by RBI have, however, made it difficult for banks to provide long-term funding.

The government has been looking at ways to make more funds available for the infrastructure sector, including setting up of infrastructure debt funds (IDFs).

IDFs will refinance the existing debt of infrastructure companies, freeing up funds of banks for lending to new projects. The government has also allowed IIFCL to continue as a sole lender in a project even after the lead lender has exited.

The Planning Commission has projected an investment of $1 trillion for infrastructure development during the 12th Five-Year Plan period ending March 2017.

India Ratings, in a report dated 30 January, had pointed out that only 20% of infrastructure loans were restructured till 31 March 2013 and the proportion could increase to 30-40% over the next two years.

“Restructuring of infrastructure loans will likely continue as the sector grapples with execution challenges and rising costs,” the report had said.

Samir Kanabar, tax partner at consultancy firm EY, said infrastructure projects, which are typically 25-30 years consortium contracts, need funding for a longer duration.

“At present, RBI has set many conditions on funding by banks. But any major relaxation by RBI, like a special carve out for infrastructure projects, given their long-term nature, will also depend on how it perceives the risks on the banks’ balance sheet,” he said.

Source- http://www.livemint.com/