Mumbai, July 17: Term-Lending institutions have started relaxing their debt equity ratios in virtually every industrial sector to prop up project financing. The institutions are also re-appraising the projects against the backdrop of the sudden dip in interest rates.

"We are relaxing the debt-equity ratio selectively on a case-to-case basis. Since the primary market is yet to look up, the revision in debt-equity norms will help projects to raise more loans to supplement a part of equity," a senior Industrial Development Bank of India (IDBI) said.

"We have been relaxing the norms for both greenfield and expansion projects," an ICICI source said.

According to institutional sources, in the second half of the current fiscal, a clutch of primary issues will hit the market with "realistic pricing".

"One of the reasons for the current state of affairs of the primary market is bad pricing of issues. The merchant bankers have been advising corporates to price the issue correctly. On our part, we will lend a helping hand by underwriting the equity issues," institutional sources said. Some of the corporates have also started privately placing equity issues with institutions to tide over the crisis.

Confirming the trend, one institutional source said: "On a very selective basis we are encouraging this. Till the primary market looks up we will help corporates raise equity. However, in the ultimate analysis it the capital market which holds the key to all investments and industrial activities."

Since the early '90s, the institutions have been following a 1.5:1 debt equity ratio for all sectors. For infrastructure projects like power and telecom, the norms are even stricter. The term-lending institutions are now selectively waiving the cap to 2:1 and even beyond that for projects in steel, cement and textile sectors. The debt-equity norms have been relaxed to a certain extent for power project financing. The prime lending rates of the financial institutions dropped by two percentage points (200 basis points) -- from 16.5 per cent to 14.5 per cent -- between May and July.

Despite the lowering of the lending rates, there has been no spurt in project financing.The Industrial Development Bank of India (IDBI) posted about 30 per cent drop in disbursements in the first quarter of the current fiscal although sanctions were positive. In contrast, Industrial Credit & Investment Corporation of India (ICICI) recorded over 30 per cent jump in disbursements in the first quarter. However, a major chunk of the ICICI disbursements was short-term working capital loans.

Despite the low interest rates charged by the institutions, some of the top-rung borrowers are raising funds through debentures and commercial papers at sub-prime rates to finance project costs. "This is a dangerous trend. Short-term resources should not replace term loans even though they can be rolled over. It may turn out cheaper in the short term, but in the long run corporates may end up burning fingers," a senior analyst said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.