IFIN stands to play a significant role in the ECA space.

Export Credit Agencies, commonly known as ECAs, are public agencies and entities that provide government-backed loans, guarantees and insurance to corporations from their home country that seek to do business overseas in developing countries and emerging markets.

ECAs in India
ECAs in India tend to favour sectors such as power, mining - machinery and development, petrochemicals and refining, ship building and ports, urban transport and metro rails, fertiliser and chemical plants, steel plants and telecom. These preferences shows a clear tilt towards infrastructure that has been India's achilles heel and also strategic areas such as mining, steel plants and telecom that can help unleash India's growth potential.

Export credit agencies such as Asian Development Bank, World Bank investment arm - International Finance Corp are well known names in India, having contributed debt for key projects across specific sectors in the country.

But, these are not the only global export credit agencies functioning in India. U.S.' Exim Bank, Export Development Canada, Japan Bank for International Co-operation, South Korea's Korea Exim Bank, COFACE from France, Hermes from Germany, China's Sinosure and China Exim, Denmark's EKF, SACE from Italy, Germany's DEG Kfw and UK's ECGD are making their presence felt through various initiatives.

India’s very own, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment, playing a major role in partnering Indian industries, particularly the Small and Medium Enterprises. It offers funding via its various programs including Overseas Investment funding, Project Finance, Lines of Credit, Corporate Banking and Buyers Credit.

EXIM also has a unique program to support project exports from India, called “Buyers Credit under the National Export Insurance Account”, which provides financing to foreign organizations for imports of goods and services from India

How ECAs operate
While some ECAs focus on direct lending, others focus on financing through intermediaries, some provide credit guarantees, while others look at the insurance aspect.

In the direct lending route, the ECA inks a loan agreement with the importer and settles the purchase contract with the foreign exporter. The importer eventually pays back the ECA as per the loan terms. This provides comfort to the exporter on payments, while the importer gets time to meet the loan repayment.

In cases where the ECA facilitates on-lending by banks, it provides a credit line or long-term concessional funding to the importers bank, which makes it easier for the importer to get a loan based on the guarantee given by the ECA.

Most country-linked export credit agencies such as U.S. Exim Bank, Export Development Canada, etc, tend to focus on providing finance to projects or companies that directly benefit trade with their parent countries. In most cases, the primary role played by government-backed export credit agencies is to ensure that they facilitate support for sectors or companies or projects that have a direct co-relation to their mother country.

However, multilateral agencies such as IFC and ADB that have a multi-nation mandate, have a broader agenda and often support lending or on-lending via local banks to projects in very specific sectors. In India, ADB has provided debt for renewables such as solar, small hydropower, agri-processing and even ports, while IFC focuses on direct lending and tends to pick and choose projects/companies across sectors.

Apart from merely facilitating trade between countries, often these export credit agencies ensure that local banks develop comfort by providing debt to companies functioning in more niche or upcoming sectors.

Many export credit agencies such as DEG focus on implementation of green norms, while ECA's from US, Europe, Japan and Korea base credit evaluation on equator principles for environment and local issues such as land acquisition and rehabilitation. Bilateral relations between countries also tend to impact the presence of ECAs in various sectors. A good example is of Sinosure and China Exim that have little role to play in strategic sectors such as telecom, defence and projects in Jammu & Kashmir and North EastIndia, as contractors from China are not preferred for security reasons.

ECA finance tends to be long-term and priced at low interest rates, but with no hedging solutions. In some cases such as US Exim Bank, loans are even offered at fixed interest rates. While this may seem similar to terms for external commercial borrowings, here, the ECAs tend to focus on the broader objectives and not just the commercial reasons when providing finance.

In non-recourse project finance, ECAs can help raise loans for 12-14 years at attractive interest rates. This helps tide over local banks' problem of asset-liability mismatches and liquidity constraints for long tenure project loans.

Local banks, including in India, tend to refrain from offering loans to long gestation projects. ECAsplay a crucial role to provide comfort for such lending, since the ECA market is less susceptible to global economic and financial market conditions, as indicated in the fact that they continued to remain active even during the global financial crisis.

Challenges Beget Opportunities
The ECAs looking to do business in India have found themselves struggling to come to terms with the long-winded approach towards getting legal formalities done for a project. Another key issue that has hindered funding of projects is uncertainty over local issues such as land and rehabilitation.

Many Indian companies that approach ECAs for projects, find that the cost and time involved in ensuring their legal paperwork for finance is prohibitive. In many cases, Indian companies have shied away from approaching ECAs for finance, even for eligible projects, as they fear that local issues or changing regulations may throw a spanner in the financing agreement after months of work.

IFIN’s role
While IFIN has a limited role in the direct lending route by ECAs, there is a huge potential that can be tapped by IFIN in the Bank-to-Bank lending format, wherein Banks lend the funds received from ECAs.

IFIN has signed an MOU with EXIM Bank of India in 2012 and this relationship has been effectively leveraged to source funding for various projects ever since. Some of the key projects that EXIM has partnered with IFIN for includes acquisition finance, project and corporate finance.IFIN is also considering an MOU with Export Development Canada, for similar opportunities 

With many large global banks such as Standard Chartered, HSBC, SocieteGenerale having dedicated ECA desks, Indian banks would face stiff competition for ECA funded projects. IFIN has also harnessed this route, by its recently signed MOU with ICBC Bank, for project funding from the Chinese markets

In terms of pricing, the ECA-Indian Bank format, which includes an ECA spread, hedge and Indian bank spread, will face tough competition from an Insurance-MNC Bank format(ECA insurance premium + MNC bank spread + hedge) in terms of pricing

The opportunity lies in the fact that MNC banks tend to neglect smaller opportunities in this space due to rating-linked loan mandates. This enables Indian banks to swoop in and provide finance to relatively smaller companies with weak credit ratings such as BBB via the ECA route.

Conclusion
Today, ECAs are collectively among the largest sources of public financial support for foreign corporate involvement in industrial projects in the developing world.

In recent years ECAs are estimated to have supported between US $50 - $70 billion annually in what are called "medium and long-term transactions," a great portion of which are large industrial and infrastructure projects in developing countries. Many of these projects have very serious environmental and social impacts.

Since a majority of the projects funded by ECAs are high risk, most would not come to life without the support and financial backing of ECAs. Hence, ECAs are strategic development linchpins that play an enormous part in global economic development

Anita Ferreira

Heads International Business Group at IL&FS Financial Services (IFIN), based in Mumbai.


Disclaimer
Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

© Copyright 2015-16. All rights reserved.