The Financial Express

Banks on the back foot in financing infrastructure projects

| Updated: November 27, 2020 16:53:22

Evaly and Fianancial Express Evaly and Fianancial Express
Banks on the back foot in financing infrastructure projects

Most of the banks in the country do not feel comfortable to finance infrastructure projects mainly due to longer concession period of the projects than the banks' loan tenure of only 5-7 years at best, according to a new study.

Nearly 91 per cent of the banks are uncomfortable in financing the long-term projects, said the study released on Thursday.

It further said the banks do not want to go for long-term financing also due to asset-liability mismatch, lack of long-term sources of funds such as bond, insurance fund, pension fund etc.

The study titled "Infrastructure Lending by Banks: Corporate Vs. Project Financing Approach" was conducted by Bangladesh Institute of Bank Management (BIBM) and led by BIBM Professor Prashanta Kumar Banarjee.

It said 93 per cent of the respondent banks and financial institutions (FIs) stressed the need for some sort of regulatory support or directives to address the issues and arrange regulatory and fiscal incentives.

The banks and FIs, however, expressed their interest to extend their exposure to the infrastructure sector subject to removal of the bottlenecks.

They also stressed the need for policy or regulatory directives to simplify the loan classification or provisioning criteria in case of infrastructure financing and sought special incentives on the exposures of a particular proportion of the banks' loan portfolios.

The study suggested taking proper and proactive initiatives from the regulators and the government to attract long-term and low-cost fund from both local and external markets for project financing.

It said that deployment of innovative financing products, including capital market instruments like bonds (coupon, zero coupon and Islamic bonds), by the government through Bangladesh Bank would facilitate the project financing.

According to the study, financial and fiscal incentives such as tax benefits, subsidy, credit guarantee scheme etc. and special consideration regarding loan classification and provisioning would help attract private investment in the infrastructure sector.

It also recommended training and capacity building of lenders, Engineering, Procurement and Construction (EPC) contractors and the equity sponsors for investing in right kind of infrastructure projects.

The study found that multilateral, bilateral or other foreign agencies have captured more than half of the financing to the infrastructure in the country.

Local commercial banks are the second group to lend the infrastructure projects (29.40 per cent) and the remaining 19.16 per cent is provided by the government-owned financial institutions.

It was found that 76.27 per cent of the respondent banks have exposure to infrastructure projects.

The banks having no exposure mainly include specialised banks, several foreign commercial banks and some newly incorporated banks.

According to the study, 67 per cent of the infrastructure projects lending fall under the project finance approach and the rest 33 per cent projects fall under corporate financing approach.

Some 70 per cent of the respondent banks said that they do not follow any specific policy or guideline for lending in infrastructure projects.

Director (Investment) of IDCOL Nazmul Haque, Executive Director of Bangladesh Bank Abul Kalam Azad, Managing Director of Dhaka Bank Emranul Huq, Senior Financial Sector Specialist, South Asia Finance and Private Sector of the World Bank A.K.M. Abdullah spoke at the programme.

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