The Hindu Business Line : Uncap the banks

It is one thing for policymakers to stress on the need for large investments in infrastructure but quite another that they have made few institutional arrangements to facilitate the participation of the domestic financial system, apart from the Special Purpose Vehicle for coordinating the massive funding required for these projects. The debt-funding requirements of large coal-based power plants — five 4,000 MW projects are in various stages of bidding — would be in excess of Rs 10,000 crore per project and Indian banks will find it difficult to participate in this set of massive projects, given their exposure limits to any single industry. These and other projects will involve consortia funding, but the participation of banks will be severely hampered by the caps that are more appropriate for smaller and shorter-term lending. Currently, bank exposures are limited to 15 per cent for single, and 40 per cent for group borrowers though the limit is higher for projects with sovereign guarantee. The power projects in question are not supported by such guarantees. The problem, say bankers, is not funds, but the restrictions on their deployment.

As much as Rs 50,000 crore is required for the five power projects and will undoubtedly be sought from foreign investors who will be wooed by creating an enabling environment. But, surely, the vast resources of the domestic financial system can be tapped. The Indian banking system has had exposure to every sector but infrastructure. The movement towards universal banking has enabled banks to access fresh sectors for asset building, but they have shied away from infrastructure because of the long gestation period, the large fund requirements and, therefore, the risks vis-à-vis returns. This may have justified exposure limits in the past, but given the capital base and the competence levels of banks the last decade, no longer are such caps justified, especially if the capital stock within the economy has to be used productively.

Removing exposure limits is not enough. Reforms will be required to create the proper grounds for participation. Three-fourths of the financial system's business is accounted for by banks; and three-fourths of that by public sector banks. The task is to strengthen the capacity of such entities to engage in activities with radically different risk profiles. Foremost, the capital base will have to be strengthened; given the government's fiscal concerns, new sources will have to be sought. The Tarapore Committee's view that the government should dilute its stake to 33 per cent (from 51 per cent) makes eminent sense as a means of meeting the new capital adequacy norms that will enable public sector banks manage complex activities such as funding of infrastructure projects. Basel II norms cater to both the new capital needs and a host of new risk management systems. The adoption of such norms is overdue for scheduled banks to become genuine universal banks. These and the removal of caps brook no delay.