Debt Financing for Healthcare

Recognize the main problems, chances, and debt-creating sources, such as banks, pay-per-use business models, non-banking financial companies (NBFCs), and external commercial borrowing (ECB).

Debt Financing for Healthcare

The healthcare industry, in India, has been subject matter of a fair amount of discussions on its growth prospects. Unfortunately, the industry has plagued by a number of problems including issues associated with being highly fragmented. The inability of the government to scale up expenditure on the creation of healthcare infrastructure has meant that the responsibility is fallen squarely on the shoulders of private sector. Sensing the opportunity there has been a number of organizations who have been scaling up their operations or new corporate houses have entered the fray. Many of these ventures have been funded aggressively by  professional financial investors backed by the Private Equity funds.

Need for growth
The existing organizations in the healthcare industry have had a couple of problems to deal with. It has to address the need to invest in infrastructure, to make it more contemporary and then grow it to achieve economies of scale.  The second has become a necessity; otherwise the cost curves tend to grow at a faster pace than the revenue generation. The other issue has been the increased competition from the corporate hospitals that has problems associated with pressures on the prices and also rising costs, primarily the staff costs.  It is in the background of this situation that many healthcare organizations have realized that sustainability and survival would depend on the growth strategies.  

Growth approach
Growth can be achieved in two main forms.  The first is through expansions in the existing facilities, like adding new beds or new investigations, generally referred to in industry parlance as “Brownfield” expansion or start a new facility in a new location popularly called “Greenfield” expansion.  Expansion in any manner would have to be funded. Funding of expansion plans can broadly in two forms namely equity based and debt based.   This article is focused on the debt based funding opportunities for healthcare organizations.

Key Issues for Debt
Ability to raise debt would be a function of a couple factors. First and foremost is the project should have the inherent ability to repay the interest as well as the principle amount!  Normally, especially if the lender is bank, the lenders would expect the borrower to offer some sort of collateral security to be offered in addition to the primarily security. Primary security is the asset that is being purchased with the loan.  The nature of the debt would be based on the end use – namely the asset proposed to the procured or in some cases for working capital too i.e. to fund the corporate receivables or the stock of inventory that the organization would be required to maintain.

Banks have been the first stop for sourcing of debt for financing expansion plans.   In addition to the submission of a detailed project report that should normally contain the background of the borrower should contain the past and projected financials of the borrower.  There are some norms for the funding that have to be fulfilled which would be governed by the loan policies of the respective banks. A margin for the loan sometimes ranging upto 25% of the cost would be insisted upon. Many banks have special schemes for medical professionals and/or healthcare organizations or for purchase of medical equipments. The tenure of the loan would also depend on the useful life of the assets.  If the equipment is self generating one, that is the organization could expect to earn revenues from the equipment, the tenure of the loan would normally be determined by that. Banks also sometimes offer a moratorium i.e. a period during which they would not expect principle repayments to be made depending on how long it takes for revenues to be generated by virtue of the investment.
While banks have always been the point of first choice, there are a couple of other emerging options that have come up.

Pay per use
In some cases, where the risk of obsolescence is high and also where the cost of equipment is also high, though not necessarily for the second part, equipment manufacturers have started offering a equipment on a pay per use model.  Under this mode the manufacturer, mostly for equipment like MRIs, would install the equipment in the healthcare organization which in turn would be required to pay for every use.  This is slightly different from an operating lease where the provider will offer turnkey solutions but in these cases only provider will only provide the equipment.

Non banking financial companies (NBFCs)
The last few years have seen the re-emergence of the NBFCs in the funding of the equipment.  Though the cost of funds may be marginally higher than that offered by banks, the advantage of this source is that they tend to settle for lesser quantum of margins for the asset purchase and generally do not insist on the collateral security.  These NBFCs are either promoted by the manufacturers or backed by these organizations.

Other Debt Opportunities
An emerging area of funding is the External Commercial Borrowing (ECB).  This can be an option where the quantum of loans is larger and the financials of the borrower is strong.  The advantage of this would be the fact that interest rates are relatively lower but the risk would be the potential depreciation or volatility of the rupee.  The risk is real and smaller organizations may not be in a position to manage this risk every effectively. This source could be good opportunity for such of those organizations that have a good part of the revenues in the form of “Medical Tourism” based revenues as they could provide some insulation in a natural hedge against exchange fluctuations.
There are other options too that could be examined, depending on the structure of the organization and its risk appetite. The current ability to borrow should not be the only criteria for a decision to go for debt.  The emerging competitive landscape and its implications on the future revenues and costs through a well structured business plan over the proposed tenure of the loan should always be borne in mind.  A meaningful SWOT (Strength, Weakness, Opportunities & Threats) Analysis along with a risk matrix should always be prepared and decisions based on them.

Author of the Article :
R.Venkatakrishnan, Director, Value Added Corporate Services P Ltd

R. Venkatakrishnan
Director, Value Added Corporate Services P Ltd | + posts