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Shipping Finance India

Ship financing has become a generic term referring to the financing of maritime projects, encompasses not just shipping, but also other sub-sectors like ports, shipyards, and containers. However, we have confined our discussion to ship financing projects.

Shipping is a capital-intensive industry, hence Ship financing is popular practice area in the industry. Vessels constitute almost 90 percent of the fixed assets (net block and capital work in progress) of a typical shipping company. A LNG carrier costs around USD 250 million, a double-hulled VLCC costs around USD 90 million and a Handysized chemical ship is around USD 70 million. In such a scenario, a shipowner or a potential ship owner wishing to acquire a vessel finds a considerable gap in his personal funds availability and additional funds requirement.

Ship financing has to a large extent remained a specialty sector on account of a number of unique characteristics associated with the shipping industry such as volatile markets, international service, mobile assets and others. Despite the intricacies involved in ship financing, sophisticated financial instruments are conspicuous by their absence. In contrast, asset-based financing in industries with a similar profile like Airways has had highly sophisticated instruments to match the prevalent risk-return structure. Internationally, term lending backed by security in the form of collateral and mortgage has been the most prevalent form of financial assistance given to shipping companies.

Globally, governments have provided substantial financial support to respective shipping industries either directly or indirectly. The growth of the maritime industry, especially shipping, in countries like Japan and Korea can be attributed to this.

Equity Markets

Equity markets comprise of equity capital markets, venture capital and private equity funds. Ship financing through equity mode is more popular in the case of high-risk projects where vessel acquisition is not backed by a firm contract for deployment or where vessels are acquired for asset play. Shipping companies adopted an equity route mainly after the 1980s for Shipping Finance in India, owing to factors like phasing out of subsidised debt funding by Shipping Development Fund Committee (SDFC), easing of norms for tapping the equity market and shipowners becoming increasingly aware of the pitfalls of a highly leveraged capital structure.

Indian shipping companies have a miniscule market capitalisation vis-à-vis the market capitalisation of the Indian stock market. Market capitalisation of the largest public sector company namely Shipping Corporation of India (SCI) is around USD 120, whereas that of Great Eastern Shipping, the largest private sector is USD 150. Currently, we have around 8 shipping companies listed on the stock exchange, scrips of whose are trading at a substantial discount to book value or net asset value.

Debt Markets

Banks and financial institutions have been the main source of ship financing via debt mode for shipping companies. The industry can avail of broadly two types of finance viz. fund-based finance and non-fund based finance. Term loan and working capital credits come under fund-based finance. Under non-fund based finance, funds are not actually employed, but a liability is created on the lenders to make payment in case of a default. Letter of Credit, bills discounting and guarantees constitute such facility.

Globally, a few banks like Christiana Bank, ABN Amro, Citibank have specialised in  Ship Financing practices. As per various estimates, around 200 banks are presently active in Shipping Finance in India and abroad.

For shipping finance in India, very few of the Indian banks and financial institutions have the necessary expertise or infrastructure to appraise shipping projects. Some of the exceptions are ICICI Limited (erstwhile Industrial Credit and Investment Corporation of India) and State Bank of India who have dedicated divisions for ship financing. Most other commercial banks show considerable skepticism in taking up exposure in shipping, as the industry through the ages has been considered highly risky and prone to innumerable dangers. A ship sails in the high seas outside the protective policies and regulation of the domestic government, where physical viewing and monitoring of the vessel is difficult. Additionally, the sector is cyclical in nature.

Broadly banks that are willing to take up ship financing proposals can be divided into six groups,

  • Financial institutions
  • Public sector commercial banks
  • Private sector banks
  • Co-operative banks
  • Non-banking financial institutions
  • Foreign banks and financial institutions