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Foreign Banks eased out of non-fund based financing - Views on News from Equitymaster
 
 
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  • Aug 23, 1999

    Foreign Banks eased out of non-fund based financing

    According to newspaper reports, the finance ministry has asked foreign banks to bring in matching capital from overseas parents in order to provide financial guarantees to domestic infrastructure projects. This will effectively ease out the foreign banks from the non-fund based infrastructure financing sector and limit the competition to domestic banks and financial institutions.

    This decision by the finance ministry could jeopardise the financial closure of a number of infrastructure projects as some domestic banks and financial institutions have already exceeded their capital adequacy ratios. Moreover, their balance sheets, in some cases, are weaker than those of the Indian operations of foreign banks. There is also a large cost differential in the guarantee fee charged by foreign banks and domestic banks and institutions.

    Given their risk taking ability and their understanding of various infrastructure projects, foreign banks are able to offer more competitively priced guarantees, which help companies to raise reasonably priced finance from the capital markets. This helps in lowering overall financing costs of the project.

    The Indian economy, which is just beginning to recover, needs a strong dose of investment in the infrastructure segment. For this, the participation of foreign banks is essential as they have at their disposal large and more competitively priced financial resources as compared to their Indian counterparts. This move by the finance ministry will dampen the sentiment pertaining to investment in infrastructure projects.

     

     

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