Banks don’t want SPVs to be part of group exposure limit

A number of banks are reportedly on the verge of exceeding their group exposure limit in the infrastructure segment. Bankers don’t want SPVs to be part of their group exposure limits

India plans a huge expansion in the infrastructure segment, in the coming years. With most of these new infrastructure segments being developed as special purpose vehicles (SPVs), bankers have been raising a serious concern on exceeding their respective group exposure limits. It is being suggested that SPVs for infrastructure projects be excluded from the group exposure limit.

“The present single group exposure limit prescribed is 40% and the single company exposure limit is 20% of the banks’ infrastructure funds. However, there is a flexibility of extending it to around 45%-50% in certain cases. This single-company exposure and single-group exposure is exceeding (the group exposure limit) and thus is a concern,” said Ashish Chandak, executive director, infrastructure banking, corporate finance, Yes Bank.

“On the basis of sanctions, we would be exceeding the exposure limit. The disbursement side will start reflecting (the group exposure limit) in two to three years,” added another official from a public sector bank, who did not wish to be named.

“We don’t hear much on that side (on group exposure limit) at present. By the end of this calendar year we may see such a problem,” said Virendra Mhaiskar, managing director, IRB Infrastructure.

“Typically, the group exposure limit is an issue for the infrastructure segment because in all the other sectors the expansion happens within the same company or under the same company name, with no involvement of SPVs,” said a banker from one of the leading investment banks in India, who did not wish to be named.

To deal with this group exposure limit issue, banks and infrastructure companies have been asking not to consider the SPVs formed as subsidiaries to a group company, as a part of the overall group exposure.

“Banks and infrastructure companies are saying that SPVs are set up for the purpose of delineating the project from the group’s current balance sheet. It is a separate company that is being promoted, even if things were to go bad, no corporate guarantee has been given. If it is SPV-based financing that is happening, then why is the exposure being clubbed in the group limit?” asked Mr Chandak.

“The discussion that is going on is that these special purpose vehicles should be considered as separate SPVs and not as part of the group exposure,” said the public sector banker who preferred anonymity.

However, not including the SPV in the group exposure limit may not be justified. The group company normally shows a consolidated picture—to reflect a better top-line—to impress its investors.

Though exceeding of the group exposure limit remains a concern at present, bankers are optimistic that the issue will be sorted out in the coming days. “I believe so many people have been talking of so many reforms at the moment and there are so many ideas that they are willing to consider now. Thus this should not be a problem in the future, but at this point of time—because it is considered as a part of the group exposure limit—this could create some kind of an issue. However, it will get sorted out,” added the investment banker.

Mr Chandak is also positive that availability of funds for the infrastructure sector will not be a problem, going forward. “People are coming out with ways (to sort out the issue). There are certain mechanisms with which things can be done. Like at Yes Bank, over a period of time, we have gone and raised capital and enhanced the balance sheet, so that we can increase the group exposure limit. Major banks which face the issue of exceeding the group exposure limit could sell a part of their total exposure to a certain group to smaller banks, who have not exceeded their limits.”

However, the government is also looking at ways and means to ease up funding for the infrastructure sector. The new NBFC (non-banking financial companies) norms will allow these entities to lend 25% to a single borrower in the infrastructure sector, up from the current cap of 20%. There could also be refinancing by the India Infrastructure Finance Company Ltd.

“I think the government will ensure certain steps in this direction (to ease up funds for the infrastructure sector),” Mr Mhaiskar said.

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    1 decade ago

    Already RBI is talking of asset liablity mismatch in banking industry.You cannot take depositors money and dole it out to the infrastucture companies.It is better we go back to the old concept of separate institutions for long term financing-like IDBI,ICICI and IFCI and allow them to issue long term tax free bonds to meet the resources.The depositors money though appearing stable and increasing year after year doesnot mean that they are not permanent-the money has to be paid on demand including Fds by reducing a little bit interest.By locking the money in long term loans the banks might fail one day or other.Of course our govt will bail out.But how many banks they can bail out?The industralists are having a hey day-their share of FV of Rs10/ can be placed by merchant bankers with FIIs/QIPs at Rs750/ borrow money from banks with D:E of 3:1 at cheap rate and if the project fails they are so many reasons to quote -like the new airports built at Hyderabad,Bangaluru,NDelhi,Mumbai (extn).You have CDR mechanism,OTS,BIFR etc,to bail them out.

    R Balakrishnan

    1 decade ago

    The bankers seem hell bent on fooling themselves. The jokers are playing with the depositors money, which will get lost and then replaced with tax payers' money. Oh what a web of deceit we weave...
    Of course, the RBI will support this move.

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