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Wednesday, 13 December 2017

On the rise

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The domestic Indian loan market has been surging ahead irrespective of the general slowdown in the global economy and much to the envy of its offshore counterpart that has languished since the global financial crisis froze international credit markets.

India is on a roll due to its infrastructure development with several key petrochemical, power, road and telecom projects being conceived and delivered rapidly. The country has ambitious plans to spend US$500bn on its infrastructure in the five years to March 2012.

There were concerns that funding problems would dent this growth but the projects found strong backing from the state-run banks.

“The public sector banks sensed the opportunity and grew much faster and thanks to their adequate capitalisation, they could also offer their balance sheet to support huge transactions,’’ said a Mumbai-based banker.

The state banks’ resilience was tested and proved when they sealed the US$3.189bn-equivalent financing for Tata Power and the Rs145bn (US$2.9bn) facility for Reliance Power earlier this year.

Also, local banks’ ability to write blank cheques for projects was seen in the US$1.15bn-equivalent 13-year financing for National Aviation Company of India. Bookrunner IDBI put the facility in place in early August and 14 state lenders participated in the loan that will be used to buy 21 aircraft and related items.

The rapid growth in infrastructure has translated into a huge opportunity for banks are now willing to underwrite deals aggressively.

According to Thomson Reuters, the Indian domestic loan volumes year-to-date have been US$31.6bn--equivalent as against almost US$45bn–equivalent in 2008.

Bankers reckon that the volumes will definitely cross last year’s numbers despite the depressed markets because a decent pipeline has developed from a stream of infrastructure projects conceived over the past two to three years along with ancillary financings also stemming from offshore acquisitions such as the Bharti-MTN deal.

The impending merger of Bharti Airtel with South Africa’s MTN group is seen giving rise to a US$2bn–$2.5bn equivalent rupee loan opportunity to domestic market in addition to a US$3bn–$3.5bn offshore loan.

But such transactions are rare so project financings will continue to be the catalyst for the growth. This year alone, project financings have contributed over half of total loan volumes.

Here, Indian banks, especially the state-run banks, are better placed to provide long-tenor loans because of their competitive funding costs, but now even the foreign banks have started to participate in project loans, albeit in a different way.

For instance, Deutsche Bank was mandated with IDBI and SBI Caps on the Sterlite Energy’s Rs55.7bn dual-tranche project loan to set up a 2,400MW power plant in July this year. Although the foreign bank did not commit any money, its presence indicated interest and the potential for foreign banks to play a role in domestic financings.

Among the infrastructure deals, power and telecom sector deals have been in the limelight because of their size and the opportunities they afford foreign banks. These prospects will come by way of conversion of a portion of the rupee loan into foreign currency. How well foreign players will grab these opportunities will depend upon their funding abilities and how comfortable they can get with Indian borrowers.

As cost of funds for most foreign banks and Indian private banks remain relatively high, it might remain a big constraint on their participation in the long-term local loans.

However, going forward the landscape might change as even the rupee financings are becoming more competitive vis-à-vis the dollar fundraisings on a fully hedged basis. For instance, rupee funding that was hovering in the 12%–13% range until few months ago has now come down to 10%–11%.

However, there is another problem that the banks might face and that is the credit exposure to a particular industry and a group. Banks are almost at their limits on their exposures to sectors such as power and some big industrial groups. Many are expecting the government to relax these limits, casewise, to help boost the projects.

Foreign players might get to play an important role by stepping in to bridge the funding gaps. This apart, the foreign banks could also play an important role in ECA-linked financings, where they have greater expertise.

ECA-linked financings have the advantage of driving pricing down, being suitable for long-term projects and providing attractive investment opportunities to lenders in the country from where the equipment is to be sourced. This would certainly open up new liquidity for Indian borrowers.

Already, many quasi-sovereign agencies have started to play a bigger role in India. For instance, in early August, US Exim Bank committed US$2.45bn under the Indian infrastructure facility that provides for medium and long-term financing of guaranteed dollar loans to Indian borrowers. This facility is restricted to infrastructure projects and capital goods purchases. US EXIM Bank has a US$7.2bn exposure to India in sectors such as aviation, telecom, oil and gas, energy and other heavy equipment segment.

Manju Dalal

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