With lenders’ bets on project loans turning awry, ICICI Bank‘s Chanda Kochhar has said project financing is set to undergo fundamental changes wherein greater focus will be on planning and diligence.
“To bring back investments, the fundamentals of project financing will have to change. Projects will have to be much more completely tied-up before they get funded,” Kochhar said at the launch of a book, edited by former RBI deputy governor Rakesh Mohan, here last evening.
The ICICI Bank’s managing director and chief executive said this shall include backward and forward linkages, land availability, natural resources and financial closures.
She, however, was quick to add that project finance will continue to be done by banks.
The comments come amid heavy setbacks faced by lenders on project loans given out over the last few years across all sectors.
The setbacks, coupled with external factors which have slowed down demand, have resulted in lenders shifting focus on retail for growth opportunities.
Within corporates, banks have been generally doing a lot of short-term working capital loans and also minimising risks by restricting credit supply to better-rated corporates.
Kochhar said not just banks, even promoters will not be committing money before all the tie-ups are in place.
“A lot more time will be spent on planning before monies get committed. That will be a substantive change in project financing,” she said.
Kochhar also diagnosed the problems faced by lenders during the post-2008 credit boom that resulted in the reverses, saying a lot of assumptions did not come true.
These included growth rates halving to about 5 per cent, delays in project clearances, dip in commodity prices and delays in backward and forward linkages, she said.
“The cash flows fell short but the leverages became a certainty because projects had started and debt taken,” she said.
There is also a need for long term money from pension funds, infra development funds and insurers to enter the project finance space in such a way that they take over the banks’ exposure after the implementation risks recede, she said.
This will help free up the money for banks to support the next wave of credit growth, Kochhar said.
It can be noted that for the past two-three years, credit growth has been continuously slipping with the past fiscal being the worst when it fell to historic laws.
In FY17 bank credit slipped to a pale 5.08 per cent, the lowest since fiscal 1953 when it was a paler 1.8 per cent. Even in the first quarter of this fiscal credit demand remained anaemic at under 6 per cent.