Missing! India's Next Generation Of Infrastructure Financiers

In November 2019, ICICI Bank Ltd. shuttered its project finance division, a unit which traced its roots back to the institution's earliest days. The private lender's decision was part of a trend well underway by then. Over the past decade, most Indian banks and non-bank lenders have switched focus from wholesale financing to retail and small business lending. Some specialised financiers like Infrastructure Leasing & Financial Services Ltd. went bust, while others like L&T Financial Services Ltd. have recently decided to exit that business.The story of India's last infrastructure boom-and-bust cycle is well documented. Now, as India tries to kickstart a new infrastructure cycle, the scars of those years may mean that the country finds itself short of lenders who are willing and able.'Banks who had taken up project finance in the past have suffered from banker recklessness, poor monitoring of the loans along with weak appraisal of projects and promoters,' said VG Kannan, former managing director of State Bank of India and former chief executive of Indian Banks' Association..Now, along with hiring a new batch of project financiers, banks need to fill gaps in lending processes on priority.VG Kannan, Former CEO, Indian Banks' Association.India's financial sector built out expertise in project finance in the late '50s when institutions like the erstwhile Industrial Development Bank of India Ltd. and ICICI Ltd. were set up as development finance institutions. While both these institutions transitioned to universal banks, they — together with State Bank of India and a few other large banks — led the infrastructure lending boom of the 2000s. Back in those days, a spot in the project financing department was a dream job for bankers who joined the sector in the '80s, recalls a former IDBI Bank official, who spoke on the condition of anonymity. A banker would have to show 2-5 years of sustained performance, before they were posted to the project finance department, this banker said.Once assigned to the department, at least five years of ground work was essential before a banker was allowed to evaluate project proposals on their own. People from diverse backgrounds — engineering, textiles, chemicals, rubber, cement — would be selected to ensure expertise across different industries. .This infrastructure lending talent pool has since dispersed. Rebuilding it will not be easy..While domestic and international consultancy firms offer technical evaluation of a project as a service, financial evaluation and structuring will still need to be done in-house, the former IDBI Bank official explained. According to a former head of project finance at SBI, who also spoke on the condition of anonymity, a good project financier would need to first be an expert at underwriting risk associated with an infrastructure project. A retail, small business or mid-corporate banker may comfort themselves with borrower quality before approving a loan. However, a project financier needs to take into account a far wider set of factors — from the political climate, to the relations between state and central governments, the bureaucracy and any legal hurdles associated with such projects, the former SBI official explained.Some domestic banks do have dedicated teams to take up projects, but more needs to be done, said Donald D'Souza, managing director and co-head of investment banking at Equirus.'Given the government’s thrust towards infrastructure, we believe demand for project financing should pick up,' D'Souza said. .Underwriting at most banks needs to be bolstered with specific sector understanding which would also entail hiring the right kind of talent.Donald D'Souza, MD & Co-Head - Investment Banking, Equirus.At India's top lenders, the people appointed to lead the large corporate financing vertical will have to ensure that the mistakes of the past are not repeated. Lenders are fully aware of the gaps which existed and have worked hard on covering them, said Rajiv Anand, deputy managing director at Axis Bank Ltd. 'In the last cycle, we saw a lot of undeserving borrowers get approvals and banks taking on exposures which are much beyond what the risk demands,' Anand said. To avoid this, Axis Bank has set up internal lending limits against corporate exposures, Anand said. These limits take into account the credit rating of the project and the merits of the borrowers. Additionally, the bank is also conducting sustainability checks on projects to avoid problematic situations. Financing infrastructure has two core components, Anand said. 'One is funding projects which are about 70-80% completed, have all the approvals in place and are promoted by strong sponsors or the government. The other is truly long-term project finance for greenfield projects.'.We are doing the former (funding projects that are about 80% completed) and are quite bullish on it.Rajiv Anand, Deputy Managing Director, Axis Bank.Lenders who have historically not participated in project finance are also gearing up.Kotak Mahindra Bank Ltd. has set up an infrastructure finance team, which consists of sector experts who will help the bank evaluate project level risk and sustainability. The bank has built this team as it expects 2023-24 to be the year where infrastructure finance truly picks up. 'Our past experience shows that private investment will follow public investment,' said Anu Aggarwal, president and business head - conglomerates and corporate groups at Kotak Mahindra Bank..We can expect to see large announcements in private space in sectors such as city gas distribution, telecom, renewables, logistics and performance-linked incentives led schemes coming through.Anu Aggarwal, Business Head - Conglomerates & Corporate Groups, Kotak Mahindra Bank.According to a senior official from SBI, who spoke on the condition of anonymity, the focus so far has been largely on road projects where the National Highways Authority of India is involved. When it comes to corporates, India's largest lender is leveraging its relationships with top-rated houses.SBI will also look favourably at projects where large private equity investors hold considerable equity stake, since promoter support in times of crisis will be crucial, this official said.The bank will use its internal bench strength, as well as seek the support of its investment banking arm SBI Capital Markets Ltd. to evaluate project proposals before committing funds. But the bank will stay away from cutting large cheques, which was a key problem in the last infrastructure lending cycle, the official said. .A pertinent question that remains is the extent to which banks will expand project financing.There is some expectation from the government that banks will aid in financing new projects, since their capital adequacy position is now strong and stress on the balance sheet is limited, the SBI official quoted above explained. However, unlike the early 2000s, there is no government pressure on bankers to approve loans, he said.According to Vinayak Chatterjee, infrastructure expert and chairman of CII's National Council on Infrastructure, most banks, barring SBI, will stay away from truly long-term project finance. 'Most lenders will prefer to engage with government projects or provide working capital financing to existing EPC (engineering, procurement and construction) projects, as far as their asset-liability position allows them to,' Chatterjee said. 'Promoters will need to look at other financing options if they want to get into greenfield projects.'One such option is the National Bank for Financing Infrastructure and Development, India's new development finance institution. ICICI Bank veteran KV Kamath has been appointed as chairman of the development financier. Once it is active, the DFI should be able to take on large scale infrastructure financing proposals without being bound by limitations which commercial banks face. 'A development finance institution specialises in providing long-term financing which goes far beyond what a bank can provide,' said Kannan. A DFI has greater flexibility, which would not only give it more control over the completion of projects, but also safeguard the interests of other lenders who participate, he said.

Missing! India's Next Generation Of Infrastructure Financiers

As India embarks on a new infrastructure cycle, does it have enough lenders who are willing and able?

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