Financing Urban Infrastructure by Banks The Successful Forays

1. Financing Urban Infrastructureby Banks � The Successful Forays Introduction Pre-reform Era Post Reform Era Financing UIP in Post Reforms Era Bank Terms Loans � VMC/SMC Experiment

2. Financing Urban Infrastructureby Banks � The Successful Forays Introduction 1991 beginning of structural and economic reforms Initially First Generation Reform program did not contain or addressed urbanisation issues per se Still some reforms came through � like 74th Constitutional Amendment Act End to issue of Govt. Guaranteed SLR Bonds by ULBs INDO-US FIRE D Project � Ahmedabad/Banglore Municipal Bond

3. Financing Urban Infrastructureby Banks � The Successful Forays Second Generation Structural & Economic Reforms are addressing urbanisation issues in recent years Creation of IDFC Tax Free Status to Municipal Bonds Tax Holiday/Exemption to Infrastructure Companies Statutes by State Governments facilitating PPP. Recent announcement of Urban Reform Incentive Fund and City Challenge fund The Reforms program has indirectly overhauled the field of financing urban infrastructure.

4. Financing Urban Infrastructureby Banks � The Successful Forays Pre-reforms era. Financing urban infrastructure was characterised by Capital rationing � everything was part of plan alloc. Government loans or international agency loans through government. Budgetary plan allocations. Govt. Guaranteed bond qualifying for SLR. Loans from LIC, HUDCO.

5. Financing Urban Infrastructureby Banks � The Successful Forays Bank�s term loan was the only source partially out of planning mechanism. But was not much of use to municipal bodies as it was characterised by �. High interest cost. Short to medium term. Excessive demand from each sector of economy as equity and debt market were not developed. ULBs were not subject to pressure to perform.

6. Financing Urban Infrastructureby Banks � The Successful Forays Post-reforms era Reduction in plan and budgetary allocations Drying of easy and subsidized funds No more Govt. Guaranteed Municipal SLR bonds Pressure to perform or deliver results on ULBs Finance Sector Reforms � Development of Capital and Debt markets, FDI, Controlling inflation, Lifting up of various restrictions

7. Financing Urban Infrastructureby Banks � The Successful Forays Banking sector reforms � Application of prudential norms Operational freedom to decide interest rates within range Reduction in assets-liability mismatch creating possibility of long term lending Reduction in SLR,CRR, benchmark lending rate etc Reduction in excessive demand for bank finance Increased competition Specific permission to finance UIP Bank rates have now got integrated with market & economic forces, thus bring economic advantage

8. Financing Urban Infrastructureby Banks � The Successful Forays Financing urban infrastructure in post reforms era Various sources have opened up for financing UI Financing urban infrastructure is not the problem If financial position of ULB is good and Project is sound or bankable But it has become complex & multi-dimensional Each source carries distinct advantages-disadvantages UI projects have different purposes & time periods as a result capital recovery period is differs

9. Financing Urban Infrastructureby Banks � The Successful Forays The critical issue is not how to raise finance but how to minimise cost and to maximise aggregate benefits. It essentially requires decision making about selection of sources to form judicious mix. How to evolve judicious mix of various loan sources. One needs one or two flexible sources of finance to formulate appropriate mix of financing UIP. Bank term loans have emerged as the flexible source of financing UIP for municipal bodies.

10. Financing Urban Infrastructureby Banks � The Successful Forays Financing UIP by banks - VMC experiment-phase 1 Started in January 1999, first of its kind VMC contracted Rs. 6600 lacs loans from banks Corporation bank Rs. 1000 lacs water supply project Bank of Baroda Rs. 2000 lacs road project Central bank Rs. 1000 lacs road project Central bank Rs. 600 lacs sewerage treatment Indian overseas Rs. 1000 lacs sewerage treatment SB of Saurashtra Rs. 1000 lacs sewerage treatment VMC withdrawn Rs. 5300 lacs up till July 2002

11. Financing Urban Infrastructureby Banks � The Successful Forays Main features of the term loans taken in phase 1 At PLR, quarterly repayment installments At the rate of 70 to 80 per cent of project cost One to two years moratorium, eight years loan repayment No government guarantee Liquid lien on investments of VMC in the bank Escrow mechanism, linked up with Octroi collection No front end fee, no document fee or any other expense Full exit option with out any load

12. Financing Urban Infrastructureby Banks � The Successful Forays SMC experiment Started in February 1999 SMC has contracted in all Rs. 13600 lacs term loans SB of Saurashtra Rs. 2500 lacs water & sewerage Bank consortium Rs. 11100 lacs water & sewerage SMC has drawn Rs. 6500 lacs in all till date and plans to contract another Rs. 2500 lacs for SWD Identical terms PLR + 0.5 %, escrow mechanism Two years moratorium, eight years repayment

13. Financing Urban Infrastructureby Banks � The Successful Forays Financing UIP by banks - VMC experiment - phase 2 Refinancing of existing commercial bank loans through loans from commercial banks Prompted by the falling interest rates & the interest and competition created by the success of first phase Started informally in April 2002 but formally in July 2002 Out of total loan contracted of Rs. 6613 lacs, loan availed was Rs.5293 lacs & loan repaid by that time was 1279 lacs Total debt stock put for the refinancing was Rs. 5333 Initially VMC tried to renegotiate loans terms with existing lending banks but without success

14. Financing Urban Infrastructureby Banks � The Successful Forays 13 banks responded to VMC RFQ for refinancing 3 banks quoting interest rate below PLR were short listed and asked to submit final quotation. Two other banks were kept in contention August 14, second round quotations opened and SBS, ICICI proposal was accepted at 10.20 % rate ICICI backed out? VMC had contingent plan First round finalist BOB, CBI and corporation banks were given second chance to come in for ICICI

15. Financing Urban Infrastructureby Banks � The Successful Forays Main features of loan refinancing experiment of VMC (phase 2) Complete transparent, proactive, participative exercise Annual interest savings 1st year Rs. 70 lacs Total interest savings in 6 years Rs. 416 lacs Floating interest rate (below PLR) Extension of loan repayment period No extra cost, no front end fee or any other charges Full exit option without any load/cost still retained

16. Financing Urban Infrastructureby Banks � The Successful Forays Way forward � problems & prospects. Shying away from decision making phenomena. Lack of finance function. Best practices are confined to handful of ULBs. The present decade will be of urban infrastructure and every-day pressure for delivery will increase. Sizeable business opportunities for banks. Banks will have to come forward on their own for financing urban infrastructure.

17. Financing Urban Infrastructureby Banks � The Successful Forays Thank You