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Last quarter, two large Indian companies looking to raise funds appeared to have been met with very different responses. L&T Finance Holdings comfortably raised Rs 10,000 crore through a combination of instruments (term loans, non-convertible debentures, external commercial borrowings and a preference share issue). Sajjan Jindal’s JSW Steel, which is looking to raise funds to invest in trebling capacity by 2030 (from 18 million tonnes today to 45 million tonnes, at roughly Rs 3,500 crore per million tonne), has been bemoaning the reluctance of banks to lend long term. India needs development finance institutions (DFIs) to boost long-term lending, Chairman & Managing Director Sajjan Jindal told ET in early January. In some ways, their experience encapsulates the fund availability faced by Indian companies today. While there is liquidity available with banks, they are not lending to long-gestation projects directly. The traditional pathways of credit routing through shadow banks have become largely defunct in the aftermath of the crisis in the sector. This means critical long-gestation projects in infrastructure and allied industries, such as steel and cement, are starved for funds. Among leaders of banking institutions and industry, a search is on for solutions. There is continued interest in commercial paper of Indian companies in bond markets overseas. Indian companies in fact borrowed a record amount — $30 billion — in 2019. But unless the domestic credit situation is quickly revived, there will be cascading delays and capacity deficit in vital infrastructure that India will need in the years ahead.
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Shailesh Haribhakti, the veteran auditor and taxation professional who chairs the L&T Finance board,says what is underway is a thorough clean-up of India’s financial services sector. He sees the current flux lasting another six months before Indian banks start lending to large, long-gestation projects again. Clean reputations and sound balance sheets would be the only criteria for funding in the future, he adds.
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The distress in the realty and shadow banking sectors is so acute that industry bodies such as NAREDCO and CII have been urging the government to take measures to inject liquidity, such as permitting shadow banks to borrow from overseas as well as directly from the central bank, a facility available only to scheduled banks. The Indian economy, currently growing at the slowest clip in a decade, perhaps needs nothing more urgently than a revival in construction and infra projects activity, a job creator across the country directly and in ancillary sectors. The national infrastructure pipeline (NIP), which aims to execute projects worth Rs 102 trillion (1 trillion is 1 lakh crore) by 2025, is meant to be a booster shot for the economy that will also reignite the investment cycle.
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According to estimates provided to ET Magazine by a debt advisory firm working closely with the government, investments of around Rs 70 trillion will be needed in the next five years, out of which at least half will be debt. Supporting industries such as steel and cement will need to invest Rs 2 trillion for capacity expansion. In comparison, India’s GDP in 2018-19 was Rs 140 trillion. Over the last decade or so, shadow banks became the pathways of India’s credit circuitry. Banks lent to shadow banks, which in turn lent to projects and large borrowers, assuming greater risk (and charging greater interest) than the banks. After the collapse of IL&FS in 2018 and the troubles at DHFL in 2019, this system has come to a virtual standstill. The loan taps at most of some 19,000 shadow banks were closed. The question now is how to contain the risks while keeping credit availability going. Seshagiri Rao, joint MD and CFO at JSW Group, says while he can raise half the money the group needs for the next 10 years (more than Rs 50,000 crore) overseas, the remaining will have to be raised in India. Rao strongly bats for a new DFI, to be backed by the government. “The role of the DFI cannot be undermined because of some bad lending decisions of the past,” he says. Crisil’s senior director for ratings, Somasekhar Vemuri, also says there is a clear role for a DFI here that can assess the risk of a new project, co-lend and possibly give a degree of comfort to banks when backing a long-gestation project in either infrastructure or a heavy industry such as steel. Not everyone thinks DFIs are the solution.
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A senior banker-turned-entrepreneur, who was associated with a DFI turned into a bank, said there is need for fresh thinking. He asked not to be named in order to avoid association with his current venture. He pointed out that the model of shadow banks borrowing large sums from banks and making smaller ticket loans is a broken model prone to asset-liability mismatches. He also says the DFIs of the nineties often got their funds through government-backed bonds, subscribed by state-owned banks. It is unlikely the government would be able to do that today, he said.
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Veteran banker Kalpana Morparia, chairman, South and South East Asia, JP Morgan, says India does not need another DFI. “What India now needs is a hybrid model, where banks will fund a project in the construction and implementation phase. They can benefit from multiple revenue streams from the project during this stage — like setting up of escrow accounts etc. After about a year from the completion of the project, as cash flows starts, players like sovereign funds and pension funds looking for longterm and stable income can take out 90% of the bank loans by subscribing to bonds.” But for that, a deep and vibrant market in corporate bonds — instruments that allow investors to lend to institutions — is necessary. Bonds will be a key instrument going forward. Infra sector sources indicate that railways, ports and power sectors are likely to corner 75% of all infrastructurerelated investments in the future. And these sectors tend to raise half their debt funding through bonds. Another problem is the Indian government’s own relatively attractive bond programme that diminishes the pricing power of the private sector. Domestic bonds come cheaper than bank loans. Kumar Subbiah, the CFO of Ceat Ltd, has successfully raised around Rs 2,500 crore worth of debt from PSU banks recently for expanding capacity. Subbiah points out that if he is able to raise non-convertible debentures from the public, the cost of finance could go down by almost 2 percentage points.
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Another factor critical to the deepening of the bond market is the success of the Insolvency and Bankruptcy Code (IBC). “Globally, investors’ appetite in bond market has witnessed a surge with the emergence of legal reforms such as the IBC and the same is expected in India. I also expect improved liquidity in the bond market in the backdrop of improved investor confidence,” says Sandeep Upadhyay, MD of Centrum Infrastructure Advisory. Shailesh Haribhakti concurs that a successful insolvency process would be the biggest boost for credit flow. He points out that the quick resolution of DHFL insolvency would provide comfort to international investors that their money is secure in the Indian market. “A bigger benefit will be when the money starts flowing back into banks through the IBC process. Banks recapitalised through IBC will be able to lend with much greater confidence, as they will not be dependent on the government anymore,” he adds. So will the government announce a new DFI during the budget? Nasser Munjee, a veteran finance professional who headed IDFC at its inception, has suggested the government set up a National Infrastructure Commission along with reviving the development finance culture, possibly with a separate DFI. The government has already set up the National Investment and Infrastructure Fund in 2015 as a sovereign fund. The NIIF has infra-focused funds. There is also the India Infrastructure Finance Company Ltd (IIFCL) that was started in 2006 and has been recapitalised in 2019. A new DFI will also have its limits — project wise as well as sector wise — and the prudent course of action would be to let many sources of funding to thrive instead of searching for one large financier. The latter approach would involve regulatory tweaks to ease flow of credit capital into India.
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Vemuri of Crisil said a separate rating scale for infrastructure bonds, which measures “expected loss” (EL) and “probability of default” (PD), is required. “While there is demand for AA- and AAA-rated bonds, when it comes to A-rated bonds, there are no takers. One of the ways is to use the new credit rating scale for infrastructure projects. Regulatory acceptance of EL-scale ratings, along with the traditional PD-based ratings, can also help channelise investments from pension funds and insurance companies into the A-category bonds of infrastructure projects,” Vemuri said. Interest in specific Indian sectors such as renewable energy, ports, transmission and airports continues to be robust among international debt investors, says Chetan Joshi, head of debt capital markets for HSBC in India. Renew Power, for instance, has raised capital abroad many times, including a $450 million round through a sevenyear green bond last week. Joshi points out that India raised an all-time high of around $20 billion overseas through bonds, of which $7 billion was for infrastructure. “There continues to be huge demand for Indian paper internationally, as global yields remain low, optimism surfaces around a resolution of the trade war and institutions want to diversify into an undersupplied country like India. Given domestic credit market challenges, issuers should try to max out this window.” Bonds and loans together, India raised $30 billion from overseas in 2019 — a record high. There have been several suggestions about what the government can do to help facilitate funds flow from overseas. One suggestion is to reduce the minimum maturity requirement for external commercial borrowings to refinance rupee loans from seven years to five years. The pricing cap for external commercial borrowings (currently at London Inter-bank Exchange Rate plus 450 basis points) may be relaxed to allow more pricing freedom. Another is to allow multinational insurance companies, who typically look at investing long term, a foreign direct investment limit of 74% instead of the current 49%. All eyes are now on what the finance minister will announce come Budget day.
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