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FIs losing ground in project financing

July 07, 2004 14:37 IST

Suffering from restrictions on raising short-term funds, the domestic financial institutions are fast loosing out to commercial banks in project financing, even as disbursements witnessed a steady growth in 2003-04, the pre-Budget Economic Survey said on Wednesday.

"All India Financial Institutions (AIFIs), which are predominantly engaged in project financing, are fast losing ground with the entry of commercial banks," the Survey for 2003-04, tabled in Parliament, said.

Economic Survey 2003-2004: Complete Coverage

It said the withdrawal of concessional sources of funds and imposition of restrictions on raising short-term funds of maturity of less than one year had resulted in AIFIs raising high cost debt from the market.

Quoting from a RBI study, the survey said the FIs' share of loan in the project financing had come down to 43 per cent during 2000-01 from a level of 53.5 per cent during 1970-71.

"Thus, AIFIs have been facing the problem of reduced demand for project financing and increased competition from commercial banks," it said, noting that AIFIs borrowed for a relatively short term 3-4 years but invested in long gestation projects which affected their cash flows.

This trend has forced several AIFIs to gear themselves to migrate to an acceptable and viable variant of commercial banking to gain a foothold in the emerging financial system, it said.

However, the survey noted that disbursements by the AIFIs had shot up by 25 per cent to Rs 41,213 crore (Rs 412.13 billion) in 2003-04 and during 2002-03, the disbursements by them had fallen to Rs 32,978 crore (Rs 329.78 billion) as against Rs 36,789 crore (Rs 367.89 billion) a year ago.

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