Banking innovatively to build infrastructure

Investments in infrastructure in the eleventh five year plan are estimated at Rs 2.056,150 crores ($ 514 billion) and the avenues to raise them are limited.

According to the Planning Commission Report on projections of Investment in Infrastructure (August 2008) it is estimated that only 30 percent of the infrastructure needs can be met directly from the budget.

While 40 percent of the requirements are expected to be met from internal generation and market borrowings, the remaining 30 percent have to come from private investment and this depends upon the creation of a supportive investor friendly environment and the ability to roll out bankable projects.

Finding these resources is the challenge faced by the economy to achieve 9 to 10 percent growth in GDP by 2012.
This calls for an innovative approach to policies. Efforts are on to mobilize funds by offering tax incentives. The Government has allowed some institutions like Life Insurance Corporation of India, Industrial Finance Corporation of India, Infrastructure Development Finance Corporation and some non banking finance companies authorized by the Reserve Bank as infrastructure Companies to issue tax free Infrastructure Bonds to raise funds. Can these institutions raise the required funds ?
Time has come for banks to restructure their balance sheets and find ways and means to support infrastructure development in a big way. Although banks have been in infrastructure financing, the tendency to avoid long term funding of infrastructure projects citing short term nature of resources and consequent asset- liability mismatch has been there since late 1990s with the introduction of asset liability and risk management concepts. Minimization of cost and maximization of profit without locking up of funds in long term ventures has been the philosophy pursued and the reforms in regulation and supervisory areas also are well suited to follow this line of approach. No doubt it has paid huge dividends and our banking system has proved to be sound and safe. But can this approach go on?
The Financial Institutions catering to long term needs of industries also found the circumstances conducive to convert themselves as banks and we have ICICI and IDBI banks in the place of ICICI and IDBI which were prominently and successfully engaged in financing huge long term projects for decades. Only institution which remained and continues to function as an All India Financial Institution is only the Industrial Finance Corporation of India Ltd. Some institutions like Infrastructure Development Finance Corporation, Infrastructure Leasing and Finance Ltd , etc, have since been developed but they are not adequate enough to meet the ever growing demands of infrastructural developments in tune with the international standards and requirements of the economy slated to register double digit growth.

Reliable Source

Banking System is the best and reliable source for infrastructure funds. With branches spread all over the country and abroad and with knowledge of the people and markets banks can easily mobilize the resources.

However, there is need for policy, regulatory support and incentives without in any way compromising on banks’ safety and soundness.

The banks should be allowed to mobilize funds for a minimum period of five years and a maximum period of ten years and these funds have to be shown under the nomenclature “Deposit for infrastructure development”.

The funds should be exempt from CRR / SLR and their investments should be allowed comparatively to carry a lower risk weight for capital adequacy.

Though the exemption from CRR will have an adverse impact to contain particularly the defying inflation but the benefits that can accrue to the economy in terms of GDP growth and economy’s international reputation and image with improved physical infrastructure. The interest earned on these deposits up to Rs 20,000 can be considered for tax exemption . The rate of interest can be more or less equal to that of post office savings interest for Fixed Deposits with tax benefits.
To Counter Asset- Liability mismatch, the approach has to be something different as far as these funds are concerned. Since the maturity pattern is definite i.e. only after five years and more, the deployment of funds will also be beyond five years and above. Mismatch may even then arise but with enough head room for adjustment.
Banks will have adequate time and opportunities to bridge the mismatch. The periodical cash flows from investments have to be recycled in such a way that they minimize the mismatch.
The take out finance which did not take off as envisaged needs to be revived to encourage infrastructure financing by banks and specialized institutions.

Securitization of infrastructural advances and development of secondary market for these papers will also go a long way in finding the liquidity for banks and minimizing the adverse impact of mismatch. It is for authorities to come out with the right environment.

Dr.T.V.Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India
( views are Personal)
( This appeared in Business Line dt 26/07/10).