The Hindu Business Line : Banking on Bollywood

Despite efforts to get organised/institutional financing for Bollywood films, hardly five per cent of the total production cost of 75 mainstream Hindi films comes from this route.

With Bollywood gaining notoriety for its flings with dirty money and underworld dons over the last few years, the Reserve Bank of India's (RBI) decision of 2001, allowing bank financing for films was received with all round optimism.

It was expected to not just bring clean money at reasonable interest rates to the industry, but also by virtue of being organised finance, force Bollywood to restructure on modern lines.

Films always suffered from the handicap of being intangible assets, when it came to institutional funding. As an individual project, the unrealised idea of a film does not qualify to be collateral till it is canned as exposed celluloid. By when, the major need for financing is over! Compounding this was that a majority of film production companies in India were small and privately held, without a strong balance sheet, making balance sheet lending virtually impossible.

Given this, film makers developed the pattern of hawking their idea — to persons capable of providing money and the trade which would ultimately ensure the finished product's screening, that is, the distributor. The typical mix of film financing thus came to be personal funds, money borrowed at high cost from the unorganised sector and minimum guarantee payment advanced by distributors.

The resident risk is encapsulated in Rabo India Finance's report on the sector, "Film production is a `hit' driven business dependent on the prevailing perception and reaction of viewers, which is dynamic in nature. Such subjectivity brings uncertainty to the underlying cash flows of the film," it says.

De-risking or trying to ensure adequate returns to cover up for costs, then gravitates towards established directors and stars, even themes — all of which have taken their toll on Hindi films. In 2002, arguably among the worst years for Bollywood, the industry's traditional funding mix left its mark.

Films were made with minimum guarantees from distributors as major capital source. The subsequent flop show gave distributors losses but producers remained high and dry with `table profits' booked in advance. Had Bollywood included bank finance in the funding mix, it would have curtailed dependence on distributors.

On the other hand, the fact that at least 50 per cent of a film's cost is usually recouped ahead of its screening, makes film financing — despite uncertain cash flows — an attractive proposition.

Still, the RBI's decision to allow bank financing, does not change the contours of film production. It continues to be tough. As director Ketan Mehta quipped at a recent seminar, "When was it ever easy?"

What has happened is that, through IDBI and a few other banks, the flow of bank debt has come in as one more type of fund flow. Otherwise, capital for making films is seen to remain a mix.

In June 2002, RBI permitted banks to finance film projects costing above Rs 10 crore. It also noted that bank boards should fix an overall exposure limit to the film industry and ensure that funding is provided to multiple projects in the interest of risk diversification. Since 2001, IDBI has sanctioned finance to the tune of Rs 104.45 crore, across 17 companies (19 film projects).

However, organised/institutional financing (including IPO funds) to corporatised film production outfits, still constitutes just about 5 per cent of the total production cost of 75 mainstream Hindi films. One reason cited for this is that a dip in bank interest rates has made private financiers reduce their earlier cut-throat levels. For many in Bollywood, the latter source also poses no documentation hassle.

A stronger reason is continued concern at banks for the film sector's distribution and completion risks. Existing and future distribution contracts (negative pick-ups, presales, ancillary rights etc) for the film can be used as collateral by lenders. For this to thrive, reorganisation of the distribution business is required with higher process transparency so that practices like securitisation are possible. As of now, downstream revenue against which film financing is tied up, is either poorly visible or too distorted to bank upon.

Completion risk, primarily delay in film production with resultant over-shooting of budget, was among culprits for 2002's flops. Its impact was felt into 2003, some films seeing the light of day only now. Besides higher discipline in film making schedules, incorporation of completion bonds is the one step solution to mitigating completion risk. But it is catching on slowly as just one Indian company offers it at present.

Bank borrowings aside, private equity capital is another source of funding. Its organised form with appetite for high risk is venture capital, popular in the IT sector but now foraying into films as well. However, it needs fine-tuning. For example, venture capitalists seek exit from investment after some time. How do you do that when production companies are closely held illiquid public companies or privately held companies offering no viable exit option in a reasonable time frame? A way out is to invest in a Special Purpose Vehicle (SPV), in which several film projects are housed, says Rabo India Finance.

One area yet outside the scope of most reforms is funding for upcoming film makers. Under the new dispensation, they have to either resort to contributions from friends or relatives or take their project to an established corporate entity that can then avail institutional financing. The latter route is needed because they don't have the track record sought by IDBI and other banks to provide finance.

An alternative is to have one's first few films attract investment or business interest from C&S television broadcasters. This secures funding from broadcasters and ensures the product's marketing.

While potential avenues of funding — even from the organised sector — are many in the film industry — and they will continue to multiply as the sector restructures and gains transparency in business — a point worth remembering for banks is that Bollywood's traditional financiers are not sitting idle. Already, with bank finance as an option and interest rates falling, the unorganised sector's lending rates have reduced in line. It is still high compared to IDBI's rates, but they have come down.

Currently IDBI can provide debt financing upto 50 per cent of the film's cost. "With greater transparency in the distribution sector or the onset of big, experienced distributors, this funding level could go up as a film's receivables become more predictable," says Sunir Kheterpal, Head (Media & Entertainment), Rabo India Finance.

Much hope is vested in 2003. As distributors shy off minimum guarantees after 2002's losses (save against top stars and directors), Bollywood has a genuine need for alternative funds. An opportunity for banks, except that unorganised financiers seem better at cultivating relationships. Sample this.

A young film maker asked IDBI at the seminar, "When I wanted money for my first film, you never gave it. Now I have made my film and got a track record. Why should I come to you for the next?"

Industry seniors say that is far fetched and analysts point out that banks cannot ignore collateral. But the question drove home a point, especially against the backdrop of huge NPAs borne or written off by the banking system in exposure to other sectors.

Picture by Shashi Ashiwal

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