Nudged by infrastructure companies and developers, the lobby of lenders recently approached the central bank to let banks assess the risk of an infrastructure company based on its cash flow and nature of counterparties.
For instance, if an energy company has a power purchase pact with
, or any other quasisovereign entity, banks should be allowed to assign a lower risk weight to such a loan exposure once the project execution by the operating company is complete and the plant has begun selling power to the public sector undertaking.
“The argument is that once the power plant is operational, the bank’s ultimate exposure is to NTPC, not the private sector company which operates the plant. And since NTPC would not default, the loan to the private company should ideally carry a lower risk. So, a higher risk weight would apply when the plant is under construction, but a lower one should be allowed when it is operational,” said a senior banker.
A lower risk weight reduces the capital that a bank has to earmark for the loan and to an extent reduces the interest rate for the borrower.
With a risk weight of 100% — typical for an exposure to a private sector infra operating company — regulatory prescribed capital adequacy of 9%, a bank would need a minimum capital or own funds of Rs 9 crore for every Rs 100 crore loan to the project. But if the risk weight is lowered to 20% — once the plant starts supplying power to NTPC — the minimum regulatory capital needed would be Rs 1.8 crore. A lower risk weight would let a bank fund more projects with the same capital without diluting equity and pass on a lower interest to the borrower.
“The industry body had proposed that the capital be allocated for infra loans based on ‘expected loss’ methodology which is typically used for loan provisioning. RBI has said that expected loss has to be funded for the bank’s profits and not capital. So, the suggestion was turned down, but the move indicates the pressure that is slowly building to find finance for more projects at manageable interest rates. There are no easy answers to infra funding and the going has become tougher with some of the banks distancing themselves from such exposures following bad experience. And RBI can’t get the IL&FS fiasco off its mind,” said another person familiar with the development. An RBI spokesperson did not respond to queries from ET.
The infrastructure developers are pushing their case with credit rating agencies agreeing to give differential ratings based on the terms and features of a project. There are cases where two arms of the same group — the airport venture and the energy company — have different ratings, with the airport company rated a few notches higher than power producing company due to better cash flow, contractual arrangements and the nature of the counterparties.
Thus, they argue that if rating companies can give a higher rating (or, assign a lower risk) based on these elements, so can a bank.
But, RBI, which has been sceptical of the style and functioning of some of the rating agencies on various occasions, prefers a more conservative approach. According to sources, the central bank in the course of annual audits of rating companies has been raising eyebrows at the practice of giving a higher rating to a company whose financials aren’t rosy but the present cash flow is comfortable.
“Despite accumulated losses, an infra company can still have a decent rating if the contractual agreements are strong, there is stable annuity flow from a road project, or the fuel supply deal is in place etc. But RBI has had its reservations about such an approach. Though this was never mentioned in the final inspection reports, RBI officers have verbally raised these issues during the audit,” said an industry official.
With such a regulatory stance, RBI’s reluctance to relax capital regulations for infrastructure is probably understandable — as risk weights to loans could vary from bank to bank under the proposed system as against the present regulation where risk weights to various kinds of loans are prescribed by the regulator. But, in the absence of any ready model to bankroll infrastructure projects and loan offtake from large manufacturers yet to pick up, corporate borrowers as well as state-owned undertakings could try to figure out ways to tweak rules, feel bankers. An RBI spokesman did not respond to queries from ET.