Environment Support Group ®

 

Mrs. Prabha Prasad

Department of Banking Supervision

Reserve Bank of India

Nrupathunga Road

Bangalore 560001

 

July 24, 2002

 

RE: Violations of RBI Circular No. IECD No. /08.12.01/2001-02 dated 20 February 2002 by financiers of the Bangalore-Mysore Infrastructure Corridor Project (BMICP)

 

Dear Mrs. Prasad,

 

Smt. R. K. Makhija, General Manager, Reserve Bank of India, Mumbai referred us to you with regard to an issue that we had brought to her attention.  She indicated to us that the issue we raised was a valid concern and that it did violate, as we had suggested, the aforementioned Circular of the RBI that is binding on banks.

 

You may be familiar with the Bangalore-Mysore Infrastructure Corridor Project (BMICP).  According to a report in the Economic Times dated 13^th June 2002 (copy enclosed), Mr. Ashok Kheny, Managing Director, Nandi Infrastructure Corridor Enterprises (NICE) has stated that he “expect(s) the consortium of financial Institutions led by ICICI to release funds to the 2000 crores project upon receipt of the comfort letter allaying their reservations over various aspects to facilitate early financial closure.”  Apart from ICICI, HUDCO has confirmed that they are giving in principle support to the BMICP and various reports suggest that UTI, LIC, GIC and BoI are involved in the consortium financing the project.

 

Circular No. IECD No. /08.12.01/2001-02 dated 20 February 2002, issued by the Reserve Bank of India to all banks and financial institutions on “Financing of Infrastructure Projects” absolutely relates with the circumstances of the BMICP.  Para 3 of this Circular states:

 

“3. In respect of infrastructure projects, where financing is by way of term loans or investment in bonds issued by government owned entities, banks/Financial Institutions should undertake due diligence on the viability and bankability of such projects to ensure efficient utilization of resources and creditworthiness of the projects financed. Banks should also ensure that the individual components of financing and returns on the project are well defined and assessed.  Lending/investment decisions in such cases should be based solely on commercial judgment of banks/Financial Institutions.  There should be no compromise on proper credit appraisal and close monitoring of the projects financed and banks should ensure that only projects that are intrinsically viable are financed.  State Government guarantees may not be taken as a substitute for satisfactory credit appraisal and such appraisal requirements should not be diluted on the basis of any reported arrangement with the Reserve Bank of India or any bank for regular standing instructions/periodic payment instructions for servicing the loans/bonds.”  (Emphasis not in original)

 

In our understanding, and as confirmed by Smt. Makhija, all financial institutions involved need to rule out all doubts, before committing to financing this project in order not to violate the letter and spirit of this Circular.  Mr. Kheny’s claim to obtaining a “comfort letter” from the State Government should not deter their judgement.  NICE repeatedly claims that project financing is based on GoK guarantees and in view of this RBI circular, it would seem the GoK is supporting an economic disaster against RBI advice, to say the least.

 

Apart from significant in-transparency and human rights violations that have marked the clearances for this project, NICE has also failed to comply with a string of compliance conditions in the clearances issued by the Karnataka State Pollution Control Board and the Ministry of Environment and Forests, and, there are critical doubts as to the financial viability of the BMICP.

 

A 1993 Asian Development Bank report has assessed that the traffic volume between Bangalore and Mysore does not justify an expressway of the type proposed in BMICP, as the traffic load is significantly less than international standards for expressways.  Furthermore, the Government of Karnataka (GoK) has, in the last 3 weeks, committed to expansion of the existing highway (State Highway 17) at a cost of Rs. 331 crore and doubling of the railway track at a cost of Rs. 276 crore.  Given this, it is unclear why BMICP continues to be supported, and whether it will be viable.  Apart from the alternative transport options being pursued by the GoK, which will cannibalise the financial returns of BMICP, it has been known from the genesis of this project that without its real estate component, the BMICP is not financially viable.  It is very doubtful if the real estate projections of the BMICP are believable given that several similar housing, recreational and corporate facility developments in and around Bangalore have failed.

 

Furthermore, it is unclear as to why HUDCO, as reported in the press, is financing the expansion of the existing State Highway, when they are also financing the BMICP.  This should cause even greater concern in light of the RBI Circular.

 

We hope that you will give serious consideration to, and act on, these violations of a binding RBI Circular, in order to not only ensure the public interest, but also to ensure that RBI rules and regulations and the high standing of the RBI are not undermined.

 

We look forward to hearing from you on this matter.

 

 

Sincerely,

 

 

 

Leo F. Saldanha                        Nagini Prasad                             Rajmohan Pillai

Coordinator – ESG     ESG Campaigns Coordinator            ESG – Infrastructure Finance Research

 

 

Cc:

Mr. Vijay Chugh, General Manager, Department of Banking Supervision, RBI Bangalore

Mr. Karunakaran, General Manager, Department of Banking Supervision, RBI Bangalore