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The best antidote
One of the reasons for financial institutions shying away from funding roads is reportedly that these projects do not conform to their norms for asset cover. In plain language, this means that the security for the loan is considered insufficient, in terms of the project finance norms for these institutions laid down by the Reserve Bank. News reports say that while the asset cover needs to be 1.5 for such loans, road-building projects do not qualify because these are on the build-operate-transfer system, and ownership rights do not get vested in the promoter in such projects. Mortgaging these projects, therefore, is out of the question, and this is a major stumbling block towards funding them.Financial institutions need to get out of the security-based mindset of a bygone era. To be sure, security is important, but it should be realised that cash flow is the best antidote against the loan going bad. Banks have insisted on tangible securities all these years, but that has not prevented them from piling up anextraordinary amount of bad debts. In a legal environment where recovery of legitimate bank dues can take decades, there is little point in insisting on tangible security. The situation becomes even more ridiculous when FIs merrily subscribe to debentures for such projects on the specious grounds that they are secured. Often, all the charge that the debentures carry is a floating charge on the project's assets, which may sound great in theory, but is of precious little use in case of default. While legal reform is undoubtedly the long-term solution, in the interim financial institutions would do well to concentrate more on cash flows rather than on asset-based funding. Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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