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The Financial Express

Financing infrastructure projects

| Updated: November 30, 2020 22:03:19


Evaly and Fianancial Express Evaly and Fianancial Express
Financing infrastructure projects

It is nothing unnatural for the banks for not being interested in financing the infrastructure projects in the private sector. The banks are also found reluctant to lend money to big projects. The main reason behind their lack of interest is the long gestation period of these projects. The commercial banks are not supposed to finance the long-term projects, infrastructure or otherwise, for it gives rise to a mismatch between their assets and liabilities. They, usually, take funds from the depositors for a period, usually, not exceeding five to seven years. So, it is not a feasible proposition for banks to lend the same for a long period.

Yet some banks ventured into the long-term lending to different types of projects and faced problems in a few cases where borrowers defaulted on loan repayments. The experience, however, has not been unique in the case of commercial banks. Even the development financing institutions (DFIs) did suffer badly. At one stage, nearly half of the funds they lent to large and medium-scale industrial projects had become classified. As a consequence, the two state-owned DFIs had to be amalgamated into one some years back in line with the recommendations coming from the multilateral donors.

There is no denying that the country is deficient in infrastructure projects. The government has been doing its part in improving the situation. It has already completed a few large projects, and some more are awaiting completion. A substantial volume of the funds needed for the execution of large infrastructure projects does usually come from the development partners, both bilateral and multilateral. The Padma Bridge is the lone exception. The reasons behind it becoming so are known to all.

The private sector does also need to play a role in infrastructure development. The government alone can't meet the economy's ever-increasing infrastructural needs. But the fact remains that the country is yet to have private sector players that are resourceful enough to finance large infrastructure projects on their own. Hopefully, that gap would be filled up gradually in the future years. 

Until then, the private sector would need financial support for implementing large projects, including the infrastructural ones. Even for public-private partnership projects, the private parties would require finance. Banks and non-bank financial institutions are not appropriate entities to fill that financing vacuum. A research study paper, prepared by a team belonging to the Bangladesh Institute of Bank Management (BIBM), has found that most banks are willing to finance infrastructure projects only if some regulatory support and fiscal incentives are in place in the matters of loan classification and provisioning. Such concessions might worsen the classified loan situation in the country's banking sector.

Instead, the government should do what is done the world over. It should strengthen the domestic capital and bond markets. Both the markets are still shallow and underdeveloped. The large part of the long-term financing should come from those. However, as suggested by the BIBM study paper, the capacity of the sponsors, lending agencies and builders needs to be improved so that they could take up the right kind of infrastructure projects.  

 

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