Infrastructure Finance in India

September 17, 2010 By Leave a Comment
Reserve Bank of India, Kolkata
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India’s robust growth during the recent decades can be attributed to infrastructure finance. Leading the developing countries list, India is growing at a rate of over 8 percent GDP. Business finance institutions have been instrumental in providing the financial support in the infrastructure space. Infrastructure needs to be complemented with business finance resources. But India has been well supported with business finance for infrastructure development activities.

Approving the inclusion of business finance in the infrastructure space, the government is laying a lot of impetus on the importance of the role of infrastructure finance companies. That’s specifically the reason why the eleventh five year plan of the Indian government foresees business finance investments in infrastructure to the tune of twenty crores plus. Directing the planning commission to encourage private business finance investment in infrastructure, the prime minister’s office has laid its objective clearly.

With the auguring of non-banking finance companies, the situation looks even better. Business finance in infrastructure will be given support by the Reserve Bank of India, which has developed specialized policy compartment for it. Infrastructure needs these special entities to fund exorbitant amounts that are difficult to raise in the market.
Infrastructure Financing Companies that have good credit ratings and over 300 crores in funds are given the go-ahead. Now that the Reserve Bank of India has made provisions to infrastructure finance companies, business finance in infrastructure will get more thrust.

Borrowers for business finance can expect to get more finance, since infrastructure companies can legally mobilize more than a quarter of its funds. This might not be over-leveraging, but does add more flexibility to the scheme of things in business finance. Single-group multiple borrowings can take more than forty percent over existing funds from infrastructure companies.

Infrastructure finance thrives on funds that have been invested for longer periods of time. Though individual investments are tough to come by, institutions like the World Bank and the Asian Development Bank are providing able assistance. Teaming up with these institutions, the government is ensuring long term investments in infrastructure.

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Analyzing the resilience of the Indian financial market

September 12, 2010 By Leave a Comment
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The Indian financial market is like a reservoir of foreign business finance investments. Liberal reforms have opened up the floodgates for incessant foreign investments that has had a black and white effect on the Indian economy.

Given the fact that India is a growing economy, there is no way the Indian government has enough internal capital to promote India’s development. To have internal business finance would mean to be an export-oriented country like some of the developed countries. So generation of internal income would have to come from exports, and exports have to pay for internal development. Since this is a tough task, foreign direct investment (FDI) remains the only option, apart from raising funds from other multilateral institutions.

Foreign direct investments are like fair-weathered friends. When the situation gets tough, they withdraw their business finance liquidity. In every economy, there exists the real economy and the pseudo economy. Situations of FDI withdrawals affect the real economy, which is the backbone of the country.

Higher business finance from FDI means the country is borrowing more. FDI will also have equity in companies in India. Sensex shoots up, the market looks good, and the rupee is made to work hard. More the FDI, more will be the demand for financial equity products. Also, the demand for the rupee will also be more.
Studies indicate that sudden withdrawal of FDI creates a jolt in the Indian financial market. Time and again, the Indian business finance scene has been doing a turnaround. Indeed, the Indian financial market is resilient to fluctuations of foreign direct investment.

Part of the credit should go to the Reserve Bank of India (RBI). Initiating policies to cushion the effects of sudden FDI alienation, the RBI has ensured the stability of the financial economy. To replace lost investment, the RBI cuts down on income tax rates. Banks are directed to offer loans at reduced rates of interest. By doing this, business finance is re-circulated within the economy, and then a replacement mechanism happens. Where FDI has been withdrawn, internal revenues act as interim fillers.

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Commercial Paper

September 10, 2010 By Leave a Comment
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In business finance, Commercial Paper (CP) refers to an unsecured payment contract. Maturity of this contract lasts up till 270 days. Commercial paper is a short-term business finance option. Since it is a collateral-less business finance option, only corporations that have favorable credit ratings get funds. Interest rates of commercial papers depend on the demand and supply of other types of prevalent business finance options. Certificate of deposits and commercial bills are some of other types of prevalent short-term financial instruments.

Credit research agencies like Credit Rating Information Services of India Ltd. (CRISIL) and a host of others may be employed by the Reserve Bank of India to determine the credit ratings of the borrowers.

Understanding a CP at a high level would be to look at it as a hand-loan given without any collateral backing. The hand-loan provider would only require a promissory note. It should be noted that the hand-loan provider would only give funds based on reliability and trustworthiness of the borrower.

India, as a rising economy has had numerous benefits from commercial papers. Funds mobilized through commercial papers stood at about forty six thousand crores as of 2008. Given the difficulties posed by the RBI for freewill external borrowings, commercial papers are proving to be an excellent source for short-term business finance.

Indian companies have benefited from the fact that commercial papers provide business finance at a much lower interest rates. Also, it need not come under the scanner of the Securities and Exchange Commission, if the maturity period of the CP is less than a year. Increase in RBI’s lending rate to banks, has increased the demand for commercial papers. RBI’s lending rate, also called the repo rate, has forced banks to also increase their lending rates. So businesses are forced to look for other alternatives. And a CP business finance option is one such enticing alternative.

Commercial papers keep a balanced borrowing power of companies from banks. Their short-term maturity model means that they self-liquidate. Commercial papers are immune to market speculation, which makes them an all the more attractive business finance option.

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External Commercial Borrowings in Indian Business Finance

September 8, 2010 By Leave a Comment
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All foreign exchange borrowings by Indian companies come under the scanner of External Commercial Borrowings (ECB) policy. Business finance instruments that fall in the external commercial borrowing category are buyer and supplier credits, bonds, credit from multilateral institutions, and so on.

Buyer’s credit is when business finance is sought from banks in foreign countries. Suppliers credit is when a manufacturer or exporter funds the buyer to buy the exporter’s goods. In the case of supplier’s credit, the exporter will take a promissory note from the importer. A post-dated cheque might also be prepared with the bank of the importer. By discounting the cheque, the exporter might realize the money. All these things happen only between businesses that have maintained a trustworthy relationship.

Another source of external commercial borrowing is foreign currency convertible bond. Before it is realized in the local currency, this bond converts to the local currency from its parent currency. Typically issued by a foreign country in its own currency, businesses other countries buy these bonds and later convert it into the local currency.

External commercial borrowings, and especially foreign currency bonds have been an excellent way for India to raise business finance. Automatic route and approval route are the two ways that Indian companies use to mobilize business finance through external commercial borrowings. External commercial borrowings for investments in real estate, infrastructure does not require approval from the reserve bank of India. These investments come under the automatic route. Government approval is required for all other external borrowings.

Indian companies planning to expand their capabilities have sought foreign currency convertible bonds extensively. To quote some examples that depict the trend in external commercial borrowings; HPCL Mittal Energy, raised business finance to the tune of $175 million through external commercial borrowings. Ranbaxy laboratories raised business finance of around $50 million this year through external commercial borrowings. All this indicates that if the government encourages this trend, local banks are not pressurized to supply monetary resources. Although more external debt might be added to the Indian economy, India’s robust growth ensures that debts don’t remain as debts.

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