Just when infrastructure financing seemed to be looking up, bankers have sounded a warning bell saying, while hardening of rates may be required to combat inflation, even a 50 basis point rise could render many projects unviable.
During a pre-policy meeting of bank chiefs with the Reserve Bank of India earlier this week, bankers appeared to have factored in the impact of higher interest rates on most sectors as a part of the inflation management drive, but indicated that the government and the central bank should take steps to ensure cheaper credit for building roads, power plants and ports.
While the government and RBI have put in place a variety of funding instruments, including an overseas special purpose vehicle that will draw upon the foreign exchange reserves, banks are still required to finance a bulk of the projects.
The Planning Commission has estimated that infrastructure will need $500 billion in the next five years to come up to global standards. Poor infrastructure is often cited as one of the biggest drags on more rapid economic growth.
"There are already signs of a slowdown in new projects. There are fewer projects in the pipeline now than six-seven months ago," said a bank chief.
While infrastructure projects are accessing funds from banks at around 10.5 per cent interest at present, the banker said many projects would turn unviable if rates went beyond 11 per cent.
"Most of the infrastructure projects are long-gestation projects. It is quite a challenge to assess risks associated with projects and price them appropriately," added a banker. The problem arose as power and port projects, for instance, spanned two to three economic cycles.
India Infrastructure Finance Company Chairman S S Kohli had recently told Business Standard that there were few projects coming up for funding.
In an interview, IDBI Chairman Yogesh Agarwal told Business Standard that during 2007-08, companies had not used the funds sanctioned, expecting lower rates in the months ahead. Now, he was seeing a situation where the number of projects being planned had dropped.
Bankers suggested that the government should revisit the clampdown on infrastructure projects since cheaper funds were required to make projects viable.
At present levels of the Libor (London Inter-bank Offered Rate), Indian companies will be able to raise funds at 7.5 per cent to 8.5 per cent after factoring in the hedging costs and this will still be 200-300 basis points cheaper than loans from Indian banks.
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