The government's showcase Indian Infrastructure Finance Company Ltd has run into trouble with two leading global banks - Standard Chartered Bank and Calyon Credit Agricole - suggesting that they may not fulfil collective contractual funding commitments of $250 million (Rs 1,100 crore).
The two institutions had start-up financial commitments in the form of external commercial borrowings to IIFCL in 2007 at 37 basis points above the London Interbank Offered Rate (Libor).
Despite several reminders from IIFCL, neither bank has released the funds, and both are now asking for interest at around Libor plus 300 basis points.
Sources in the state-owned infrastructure financing company, which was incorporated on January 5, 2006, confirm that letters of protests have been sent to the two banks and legal recourse is being considered. The financial damage would be more than Rs 100 crore (Rs 1 billion) on account of changing interest rates, said a senior IIFCL official.
This is the second time an infrastructure fund has run into problems. A $5-billion fund under Citigroup, Blackstone and Infrastructure Development Finance Company also suffered because of the reluctance of foreign financiers to release initial funds.
Meanwhile, IIFCL is holding talks with the World Bank to raise a $600 million soft loan, sources said. It has already tied up with the Reserve Bank of India to raise up to $5 billion to finance capital goods imports for infrastructure projects. RBI had already issued the first tranche of $250 million.
The problem with Standard Chartered and Calyon (created after the merger of Credit Lyonnais' corporate and investment banking division to Credit Agricole Indosuez), has its origins in the US sub-prime-hit global financial markets and delays in obtaining government approvals.
The agreement between IIFCL and the two banks in 2007 was to raise $150 million (Stanchart) and $100 million (Calyon), for which the principal was to be repaid at the end of the tenth year.
Since IIFCL is a wholly-owned government company, its debt is sovereign guaranteed, which lengthened the legal formalities for the transaction that were completed only in January 2008.
IIFCL chairman and managing director S S Kohli was not available for comment, being abroad to discuss a fresh line of credit with the World Bank.
A Standard Chartered Bank India spokesperson declined to comment. "You will appreciate that we do not comment on any matters relating to our clients," she said. Efforts to reach Calyon's India representative yielded no results.
The failure to tie up debt raises doubts about the government's ability to focus on infrastructure investment, the requirement for which is conservatively estimated at $250 billion over the next ten years.