FIs working on new bankable model for infra finance

MUMBAI: The country’s largest financial institution Life Insurance Corporation (LIC) is joining hands with leading banks to provide long-term infrastructure finance.

The life insurer will soon enter into a tie-up with IDBI Bank, in which the latter will use its appraisal skills to identify projects where LIC can deploy its long-term resources. LIC had earlier entered into a tie-up with State Bank group for infrastructure finance.

Some years ago, IDFC had entered into a similar arrangement with SBI. But this did not work out due to differences in prices and technical issues like guarantees. However, the financial institutions may try to evolve a solution this time due to the emphasis given to infrastructure finance.

In the partnership with IDBI Bank, LIC will structure a term loan in such a manner that repayments would be stepped up as the years pass. This is done with the objective of ensuring that the debt service coverage ratio (DSCR) and the internal rate of return (IRR) of a project do not suffer. The DSCR is the ratio of cash flows available for debt service to debt service obligations.

In infrastructure projects, the cash flow is low initially and picks up as the years go by. The only way to make the debt serviceable is by bringing down the level of payouts in the initial years. LIC will also look at taking out financing, where the loan would be held by IDBI in its books for the initial years and then subsequently taken over by LIC on pre-agreed terms.

The country’s largest bank, SBI is also looking at floating long-term instruments to raise resources for infrastructure finance from institutions with long-term funds. For IDBI Bank too, the problem is that after its conversion the average maturity of its liabilities has come down.

However, it continues to receive proposals for long-term funding of infrastructure projects. Sources say that IDBI is also planning to look at financing structures in which IDBI provides loans for medium-term while LIC gives long-term funding. LIC generates a total income of close to Rs 1 lakh crore and nearly two-thirds of that is invested in long-term assets. However, most of these are either government-led or government-guaranteed. The corporation is extremely cautious in lending to private projects.

Although there is no dearth of long-term projects, most of them are not bankable from a financier’s point of view. For instance, a couple of large power projects are yet to have their power purchase agreements in place. The other major problem with long-term projects is the viability gap — the difference between the expected cash flow and the debt service burden. In several cases, the government is yet to put in a structure for funding the gap.