Steps the film industry should take to rejuvenate film financing by banks

If you were to consider real estate as the most risky sector for financing, film financing may be riskier by some estimates, due to absence of any tangible security for recovery of dues in case of default

By PwC
Updated: Mar 1, 2017 09:57:56 AM UTC
Photo: Shutterstock

The success of a film is often weighed on the contours of budgets with which it is produced – low budget films with a good box office collection and big budget films irrespective of their collection, make it to the news. The rest are probably not considered news worthy.  Film financing is a pertinent part of the entire process of film production and is required to be taken care of at every stage.

From the year 1998, the Indian government took initiatives to boost film industry and make available avenue for institutionalized funding.  For a good decade from then, IDBI and EXIM Bank were forerunners in providing institutional funding for production of films. With measures like lower interest rates, IDBI went pretty aggressive in financing films during this period. Yes Bank led the film financing business from amongst the private sector banks.  Then came the period when institutional funding for films dried up. IDBI, EXIM Bank and Yes Bank, decided to go slow with the sector and the rest followed.  This blockage of funds was not sudden, it was gradual and attributable largely to the following:

  • A recessionary trend globally which hit the film industry as well between 2008-10
  • Failure of some big budget films where major banks had an exposure
  • Change in the manner of film distribution (eg. Minimum guarantee arrangements replaced by revenue sharing arrangements – repayment was now dependent on the success of films increasing the risk).

If you were to consider real estate as the most risky sector for financing, film financing may be riskier by some estimates, due to absence of any tangible security for recovery of dues in case of default.  High risk calls for higher returns. Classical form of banking asks for higher interest rates with higher risks. Therefore, globally the film industry typically is averse financing from banks, whereas private financiers are often preferred: Producers would approach a bank only if other means of financing had failed. Therefore, though it may be true that financing of films by banks has stagnated over time, it is also a fact that the film industry itself do not ask for funding from these institutions. The film industry can take the following initiatives to possibly rejuvenate interest from banks:

  • Insuring a film against unforeseen circumstances affecting the film during or after the production – Indian producers don’t generally insure their films against unforeseen circumstances. Risk is a major factor keeping the banks away from the sector and failure at the box office is just one of the risk factors. Other risk factors like piracy, legal suits, incapacitedness of the actors during the production process, etc, can be insured.
  • Adopt professional practices making the sector attractive for Bonding Companies – Some films never reach the cinema hall. This films are abandoned at production stage blocking the financiers money for a while, which, at times, is never recovered.  Bonding Companies guarantee the completion of contracts / performance of services under the contract which can give additional comfort to banks financing films.
  • Including digital / non-linear sources of revenue while preparing proposal seeking bank financing – Obviously, box office collection is the major source of revenue. However, other traditional sources of revenues like theatrical, satellite, merchandising, music and other recent sources like digital rights / non-linear sources of revenues can also be substantial.  These sources of revenue may at times perform independent of the performance of the film at the box office.  Such revenues can be projected in the proposal and lien on same can be offered to the financiers limiting their overall risk.

‘Once bitten, twice shy’ is the situation of banks who financed films in the past.  Therefore, a lot needs to be done at film industry’s end to recoup their confidence in the sector.

- By Frank D’Souza, Partner, PwC India

The thoughts and opinions shared here are of the author.

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