Long-term Financing in India | 10 Jul 2018

Recently the Union Finance Minister raised concerns over long-term financing in India.

Long-term finance for industries includes those financial resources which are advanced to the industries for a period of more than a year.
Long-term finance is quite important for the expansion and modernization of industrial projects and also to meet its fixed capital expenditure requirement.
Long-term finance is mostly available from the sale of shares and debentures, and a loan from banks and financial institutions like etc.

The phenomenal growth in bank credit, at a compound annual growth rate (CAGR) of 39.31% over the last 15 years, without the requisite due-diligence invited certain undesirable consequences, like high stressed assets.
Rising NPAs are forcing banks to resist from lending especially to major projects. Therefore, the need of the hour is to ensure assured and guaranteed long-term funding.
The projects needing long-term financing are often complex and involve a large number of parties. Secondly, these are subject to various risks including those due to changes in policies, delays in clearances, etc.
Thirdly, where debt financing is dominated by the banking system, the fundamental problem posed by the asset-liability mismatch is critical.

Providing longer duration loans from much shorter maturity funds is called an asset-liability mismatch.
For example, Banks’ primary source of funds is deposited (their liabilities), typically having short- to medium-term maturities which need to be paid back to the investor in 3-5 years. In contrast, banks usually provide loans (their assets) for a longer period to borrowers. This could be a cause for payment crisis as the money is locked with the borrower.

A sharp decline in public and private funding for key growth sectors and basic infrastructure are creating huge gaps in long-term finance for development.
Attracting private sector finance and investment is necessary to help India meet its development goals.
As per an estimate, India needs Rs 31 trillion (US$ 454.83 billion) to be spent on infrastructure development over the next five years.