Miguel Gutierrez Director, KfW IPEX-Bank.
We from KfW IPEX-Bank typically lend directly to the borrower or project on the ground in India on pure commercial terms, says Miguel Gutierrez, Director, KfW IPEX-Bank. Excerpts...
What is the role and definition of KfW for India? Which industry sectors are likely to utilise the ECA financing options offered by them? Give us a brief on this financing model which will be implemented in the country.
KfW has three different arms under which international financings are being carried out. These are KfW Development Bank, DEG and KfW IPEX-Bank. The ECA business is wholly taken care of by KfW IPEX-Bank which stands for international projects and export financings. In the past, ECA-backed financing has been particularly interesting for larger capex investments both for public sector undertakings and private sector companies. In the recent past, large utilisation of these structures happened on the petrochemicals, power generation, steel manufacturing and in the automotive industry. Some of these sectors are facing challenges of their own and going ahead. I would see continuous demand for ECA financing from the manufacturing sector, in particular, the automotive industry, and also for rather newer sectors such as port operators.
We understand you are lending to Indian banks at highly subsidised and competitive interest rates. Will these rates impact the interest rates charged by these banks to the selected parties requiring the funds?
Under KfW IPEX-Bank, we do not provide promotional loans and I cannot comment on the business of KfW Development Bank. We from KfW IPEX-Bank typically lend directly to the borrower or project on the ground in India on pure commercial terms. Mid- and long-term project and export financing is our bread and butter business. However, we may want to on-lend through an Indian bank if that is beneficial for the borrower. These are exceptional cases and not the norm.
In addition to floating interest-based financings, we can make use of the ERP Export Financing Programme to finance German exports to developing countries as administered by KfW on behalf of the German Federal Government. This programme comes under the commercial interest reference scheme (CIRR) as set forth under the OECD consensus, the international arrangement for officially supported export loans. In fact, these CIRR loans are fixed at an attractive interest rate so that the borrower does not carry any interest risk for the term of the loan.
Similarly, what are the other caveats attached to such lending in terms of industry sectors or other aspects?
This really depends on a case by case basis. Each sectors has its own specifics and even the OECD Consensus provides for sector characteristic caveats. This is also a reason why KfW IPEX-Bank is organised alongside infrastructure and industry groups. Each sector has its own particularities and there is no one size fits all solution, even in at the first glance standard ECA loan.
Will the ECAs have final say in such proposals? If yes, to what extent?
Very much. In the end, the ECA is the major risk taker under the loan and hence they will conduct their own due diligence. At the same time, they vest certain powers to the lending bank who acts in their interest. From that angle, you will understand that it is extremely important to steer the entire process with the ECA in an efficient and adequate manner right from the beginning. In India, we have been structuring and arranging ECA-backed loans since the regulatory environment became conducive to the same.
In the event the party needs to buy technology which are expensive will understandably be sourced from the country of origin of the ECA. Will they help in economising or rationalising costs of the same?
True. You might come to the conclusion that a particular product on its own might be more expensive than another. However, if you then also add on the respective financing costs for the same, on an all-in basis, the picture might change. ECA financing intents to enable buyers to purchase the equipment from the respective country of ECA. Additionally, some local costs and services can also be covered. You strongly need to have an experienced bank on board in order to optimise the total amount of eligible goods and services.