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— N.S. Srinath, Executive Director, Bank of Baroda

Starting in 1908 from a small building in Baroda to its new hi-rise and hitech Baroda Corporate Centre in Mumbai, Bank of Baroda is one of India's largest public sector banks with deposits of around Rs 2,41,044 crore as on March 31, 2010. N.S. Srinath speaks to Sandeep Menezes on a range of issues that confront the banking sector vis-à-vis infrastructure and BoB's own exposure to the core sector.

Indian banks cannot lend for long duration due to the short nature of their source of funds. As a result, their exposure to infrastructure is limited. How can this be overcome?
Currently, there exists an option called takeout financing. In the initial part the bankers can take these loans with the commitment that maybe in one or two years these loans can be taken over by term lending institutions while banks will continue to support.

You have rightly pointed out that banks do not have long-term sources since as per rules also banks can accept deposits for up to 10 years maximum. But in general the public keeps deposits in the range of around one to two years, so there will definitely be a mismatch. But banks are also raising other types of funds; maybe, if some long-terms bonds are raised to meet the requirements to some extent.

Banks therefore do have a mismatch in terms of long-term funding. But within the existing limitations banks do continue to finance infrastructure loans for a period of seven to eight years.

One way to address the issue is takeout financing, the other option is that banks raise longterm bonds.

What is the current scene with regard to takeout financing?
It has not taken off to a great extent until now. Actually, takeout financing is an evolving concept and is still developing. It should take off in course of time. We should also remember that banks were totally away from the infrastructure scenario till a few years ago. Now banks are gradually entering infrastructure and it will develop further.

Does the current model of takeout financing need any tweaking to give it a boost?
Some new term lending institutions should come out to do this particular activity. I mean that more institutions are required to raise long-term funds.

Some economists have suggested diverting forex reserves to infra development.
The reserves have been built up from various sources and have their obligations. But I think that for the present requirement institutional financing will be able to take care of demand.

Risk identification and allocation is a key challenge while undertaking project finance. How can this challenge be handled properly?
The risks pertaining to infrastructure projects are mainly time overrun, cost overrun, project completion etc. But for bankers the main risk associated with any project is the credit risk or risk of default.

Another risk is the long tenure of these loans and associated interest rate. Banks need to take care of interest rates for these longer tenure loans; I mean the interest rate at which we mobilise and then lend.

Evaluating fluctuating interest rates in long-term loans is still a developing area; it will develop in course of time.

Earlier bankers were only known as working capital lenders; even term loans were left to IFCI, IDBI, ICICI etc. But bankers have started not only working capital but in large measure term lending also.

Likewise, infrastructure is a new area and bankers will learn how to overcome the risk attached to long-term lending.

India needs over $1 trillion for infrastructure development in the next five-year plan. What will be the likely sources of funding?
One source could be term lending institutions and bankers, but then the project owners' contributions also come from various sources.

There will be adequate government support since all these projects are of national importance. The government will support such projects through methods such as budgetary allocation and institutional mechanisms wherein they may come out with new financial institutions by providing requisite funding to support them.

Mobilising the domestic savings is also another option; for instance, IIFCL recently came out with infrastructure bonds. The public is also given income tax benefit to invest in such bonds.

Do you think that sectoral limits for banks actually restrict the flow of funds in infrastructure development activities?
Any prudent financial management requires certain sectoral caps; otherwise it will be skewed in one segment only. Even within infrastructure, depending upon the particular segment or sector, there should be a cap in my view. This is in the interest of good and orderly growth; otherwise we will witness growth in one sector without corresponding growth in another sector. I think it is always advisable to have certain sectoral caps.

With huge infrastructure development activity on anvil, do you feel the time has come for Indian infrastructure companies to look at overseas funding?
Only if Indian infrastructure development companies are able to raise at competitive rates because overseas funding also involves the risk of exchange rate; thereby, the institution will have interest rate and exchange rate risk. It may not be a good thing since it exposes the particular institution to risk. The ideal scenario should be resource mobilisation within the country. To some extent dependency on foreign funds may be required in view of the enormous funding requirement towards infrastructure.

What is Bank of Baroda current infrastructure funding exposure? What is your long-term funding target?
We are into lending towards infrastructure and have trained our officers, especially in the project finance department. We have certain exposure limits which we want to take up in view of our growing business strategy. BoB's total business has crossed RS. 4,42,000 crore and our credit is well dispersed. We also have good exposure to agriculture, MSME, retail, corporate lending etc.

In infrastructure sector, we want to lend up to our exposure limit. We are focusing on three infrastructure segments-roads and bridges, telecom and power.

What is BoB's procedure for risk evaluation in infrastructure project lending?
Basically, any project will be evaluated by a technical team which is well experienced. There are certain parameters for any project evaluation and all proposals go through an expert technical evaluation committee. They will see all the risk associated with the project and check if it is economically viable while being technically feasible.

There is a project finance department which takes care of all project evaluation. We also have a risk management department since bankers have a separate risk management department headed by a general manger.

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