X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
How do banks lend to the infra space? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 6, 2010

    How do banks lend to the infra space?

    How does bank financing to infrastructure companies work? Most infrastructure (infra) projects take 10-15 years for completion while average bank deposits are of a shorter duration (anywhere between 1 month - 5 years). Here long term assets (infra-loans) are funded by short term liabilities (bank deposits). This scenario creates an (ALM) asset liability management mismatch. While depositors can demand funds early, the funds may remain locked up either in an unfinished road or a power project.

    While fixed deposits are very popular amongst Indians, the participation in equity investments in India is low. Only around 1% of the population has demat accounts. Most of India’s large saving class thus invests their surplus funds into banks. These are considered safe investments by the conservative Indians. With such enormous funds available to deploy, banks could deploy them profitably in the infra space. But, how do these banks lend to the sector despite the ALM?

    Source: IDFC FY10 annual report
    Note: Does not include debt financing from NBFCs, insurance companies & ECBs

    One method which we will discuss in this article is called take-out financing.

    It is a method of providing bank finance for longer duration projects (10-15 years) by sanctioning medium term loans (say 5-7 years). This is how it works out. Banks enter into an understanding with an institution, (IIFCL, IDFC etc), that the long-term loan will be taken out of their books within a pre-determined period (e.g. 5 years). This helps prevent any possible asset-liability mismatch. After these loans are taken out of the banks’ books, the institution can sell these loans to other banks or keep it on their own books. The bank which disbursed the loan will be paid off by the institution or the second bank after the initial 5 years. A consortium of banks can also enter this type of financing, with 3 banks each lending funds for 5 years for a 15 year project.

    This take-out of loans can be on a conditional or an unconditional basis:

    • Unconditional: This method of take out finance involves the assumption of partial or full credit risk by the institution (IDFC, IIFCL). They agree to take over the finance from the original lender (bank) after the initial period.

    • Conditional: In this case, the taking over institution (IDFC, IIFCL) would have certain conditions which need to be satisfied by the borrower before it is taken over from the lending institution (bank). These may include that a certain percentage of the project should have been completed, etc. before the loan is taken over.

    According to new RBI guidelines, takeout financing can also now be done over the external commercial borrowings (ECB) route. This means that domestic rupee loans can be refinanced though cheaper forex-loans after a certain period. This is applicable to companies involved in seaport, airport, road and power sectors.

    Way forward

    Takeout financing helps banks to manage their asset-liabilities mismatch better. It also helps free up the balance sheets of banks after a certain period, thus helping them to bankroll more projects in the infra space. Government backed institutions such as IIFCL and IDFC take over the loans after a certain period, thus credit risk is transferred. However, certain criterions need to be fulfilled in order for the loans to be taken off the banks books after the initial period. Thus banks have to become more careful and lend only to viable projects which are estimated to have strong positive cash flows.

     

     

    Equitymaster requests your view! Post a comment on "How do banks lend to the infra space?". Click here!

    1 Responses to "How do banks lend to the infra space?"

    Chandresh Jariwala

    Oct 7, 2010

    does bank's show how they grant loans to such infrastructure companies in public?
    Also, does credit rating agencies verify project cash flows and involved risks?

    Like 
      
    Equitymaster requests your view! Post a comment on "How do banks lend to the infra space?". Click here!
     

    More Views on News

    IDFC: Ends FY17 on a Healthy Note (Quarterly Results Update - Detailed)

    May 30, 2017

    IDFC regains its tempo in FY17 post the demerger of the banking business.

    IDFC: Earnings Hit by Higher Provisioning (Quarterly Results Update - Detailed)

    Feb 17, 2017

    IDFC declared the third quarter results of financial year 2016-2017 (3QFY17). The income from operations grew by 30% YoY, but the entity has slipped into loss during the quarter.

    HDFC: Red Flag in Developer Loans (Quarterly Results Update - Detailed)

    Aug 10, 2017

    HDFC starts FY18 on robust loan growth but asset quality slips on increased exposure to developer loans.

    Shriram Trans Fin: FY17 Ends on a Tepid Note due to Regulatory Headwinds (Quarterly Results Update - Detailed)

    Jun 22, 2017

    Demonetisation led slowdown coupled with shift to stringent bad loan norms keep Shriram Transport Finance on a slow wicket.

    Power Finance Corp: Alignment with RBI Norms Knocks Down FY17 Earnings (Quarterly Results Update - Detailed)

    Jun 14, 2017

    Power Finance Corporation earnings hit by RBI mandated higher provision on state government power generation projects where the recovery continues to be 100%.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    IDFC LIMITED SHARE PRICE


    Aug 24, 2017 12:28 PM

    TRACK IDFC LIMITED

    • Track your investment in IDFC LIMITED with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    IDFC LIMITED 8-QTR ANALYSIS

    Detailed Quarterly Results With Charts

    COMPARE IDFC LIMITED WITH

    MARKET STATS