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Show Me The Money!

Even though Bollywood enjoys industry status, banks are still reluctant to lend to producers. This, coupled with crushing taxes, has dealt the industry a double blow

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The ambitious ‘Make In India’ program, a pet initiative of the Narendra Modi government, has earmarked the Media & Entertainment sector as one of its key thrust areas.

Needless to say, the entire film industry welcomes this prioritisation and feels privileged to work towards the growth of the national economy and by extension, its clout on the world stage.

Like with every other economic endeavour, the growth of the film industry is contingent on the flow of capital and liquidity, as also taxation and other policies that promote investment in the various arms of the filmmaking ecosystem.

How does the current financial support system of the film industry measure up to what is required for it to fully realise its potential as a major contributor to India’s economic strength? Read on:

lalit-chatnaniLalit Chatnani, Director, Finance,  Sony Pictures Entertainment, India

The Indian film industry is burdened with very high taxes, with the average rate of entertainment tax being 27 per cent. We are, in fact, one of the few countries with the highest entertainment tax. As a result, net earnings continue to be low. With the political will behind GST now, one hopes that once entertainment tax is replaced by GST, the effective rate of tax will come down by 10 to 12 per cent. The flip side is that municipal bodies across the states have the power to levy their own taxes, despite GST, and so one still doesn’t know what the eventual percentage will be. Currently, the input credit of service tax is also denied to the extent of revenue generated from theatrical revenues and this leakage of input credit loss will be a thing of the past once GST takes effect.

When it comes to financing movies, the studio model, which looks at varied options – acquisitions, co-productions, productions – works best. Apart from a greater appetite to experiment with content, the alliance of production houses and studios has resulted in long-term associations that have set new benchmarks in terms of revenues and creativity. The model is dynamic and evolving still, as more and more avenues to share and monetise content arise.

shailesh-singhShailesh Singh, Producer

It’s not that banks don’t finance films at all. There are production houses which do get finance from banks, especially corporate studios or basically anybody who is credible. But when it comes to films, there is a huge risk factor involved.

In fact, in between, banks started offering finance but a few of them witnessed major losses and that’s when they grew reluctant to continue. Now which business doesn’t suffer losses? The problem with films is, there is no tangible product. The solution to the lack of film financing is that we have to become more organised.

Filmmaking is based on one man’s vision, and it is still not considered a ‘serious business’. People associate films with the entertainment industry and that’s why it took so long for us to get industry status. Consider the risks. When you make a film on a budget of Rs.5 crore and also spend Rs.5 crore on marketing, budgeting like this doesn’t work with a bank. Also, just because one film does business of Rs.200 crore doesn't mean every film will follow suit.

There is a talk of Disney shutting shop in India and other foreign corporate studios may do the same because of the way they process. You can’t make every film on a budget of Rs.50 crore, without looking at the returns. The problem with these studios is that they don’t concentrate on content. They first look for an actor, then a director and then a writer to write a script. Shouldn’t it be the other way around? In India, we make ‘projects’ rather than films. Bollywood is virtually tuning into a studio and everyone just wants to make money.

Two of our biggest industrial houses entered the filmmaking business but quit when they started making huge losses. We have to acknowledge that understating a product and understanding a film’s script are two very different things. You can learn about marketing a product in college but films are a creative medium.

Also, even if you make a good film, it does not necessarily mean it will earn the expected money at the ticket counter. Dharma Productions and Yash Raj Films have survived for so long because they believe in making good films. Even if two successive films don’t work, their third release will.

When corporate houses came in, banks started financing films but they started to face huge losses. There was no recovery for them even in upcoming projects. That’s why producers have to take money from the market at high interest rates.

If Rajkumar Hirani asks a bank to finance his film, do you think the bank would agree? Of course, it would because Hirani takes two years to write a script and two years to make a film. He doesn’t allow his film to release unless he is satisfied with the project. That’s why he is such a bankable director among the audience.

frank-dsouza-1Frank D’Souza, Partner & Leader, entertainment & media, PwC India

 Film financing by banks

With the grant of industry status to the film sector in 1998, and the subsequent amendments to the IDBI Act, 1964, to recognise the film industry as an ‘industrial concern’, followed by guidelines issued by the RBI in 2001 to banks for financing film production, there was considerable expectation that filmmakers would find film financing through banking channels to be a viable and realistic option.

However, over the years, apart from IDBI and Exim Bank, and to some extent Yes Bank in the private sector, there hasn’t been significant uptake as far as bank financing to the film industry is concerned. In particular, IDBI was aggressive in financing films, with measures like lower interest rates for a considerable period of time, ever since it started financing films.

After initial financing by these banks, which ran from the period 2000–2008/10, film financing by the banking sector has been rather limited or non-existent. This sudden fall in film financing by banks was seen as a result of the failure of certain big-budget films, in which these banks had exposure. The change in the manner in which films were distributed (i.e. minimum guarantee arrangements replaced by revenue-sharing arrangements) has also contributed to increased risk and consequently reduced funding by banks. Though this lack of interest in funding by banks was across the industry, big production houses did not face a challenge while raising funds from banks at the corporate level.

As a matter of fact, if one had to look at global practices, the sector does not lend itself easily to the classical form of bank financing. The reasons are not too difficult to comprehend. First, bank financing, by its very nature, works on returns, which are coupon-based and subject to overall NPA thresholds. Films are naturally a high-risk proposition and do not easily lend themselves to the financing contours of a banking institution.

By some estimates, investments in this sector have been considered as being riskier to those even in the real estate sector. This could be primarily because of the absence of any tangible security to recover the dues in the case of a default. The high risk leads to high interest rates on borrowings, which makes financing from banks unviable for producers.  Also, film financing requires a good understanding of the film sector, and it is appropriate to reflect on whether banks are suitably skilled to analyse the purposes of evaluating and processing funding requests.

Potentially, two elements could to some extent alleviate the current lack of enthusiasm among banks to finance films. First, a separate threshold should be sought on Non-Performing Assets (NPAs) as far as lending to the film sector is concerned (where the RBI would have to step in and issue guidelines to banks on NPAs).

Second, the philosophy of financing should be relooked by engaging in slate financing rather than on a per film basis, so as to provide an enhanced ability to mitigate risk.  However, regardless of these elements, one needs to recognise that film financing by banks will not exceed a particular threshold given the very nature of the sector — and such thresholds naturally will not be very high.

Given this, it would be worthwhile to consider what would enable financing by the ‘right set’ of participants.  Let me explain this. Film finance, by its very nature, is privately driven and given its risk profile, lends itself more easily to financing by private players. This could be in the form of individuals, entities or film funds.

Many a time, current regulations, whether the Companies Act, NBFC regulations or foreign exchange laws, do not allow for the easy implementation of such funding models. There is a need to bring in enablers which will facilitate the easy deployment of such private funding. These would be (i) clarity on the classification of the nature of returns earned by the financiers, so as to provide certainty on taxation; (ii) laws permitting easy repatriation on cross-border transactions, including delimiting the quantum of return and declassifying such financing as debt. Admittedly, in such financing, the financiers do seek, in certain cases, ownership in the Intellectual Property — which needs to be considered.

Also, the industry will need to make space for enhanced adoption of professional practices, which will allow bonding companies to operate in this space in India. Bonding companies will go a long way in de risking at least one element of the film process, i.e. completion of the film. Internationally, this tends to be an important element to create a conducive environment for financing.

The risk associated with film production is not just limited to failure at the box office; factors such as piracy, legal suits and incapacitation of actors also increase the risk involved. However, insuring a film against these risks in the production phase is not a widespread practice in India. Insuring a film against unforeseen circumstances may give further comfort to the banks and other financiers while evaluating proposals to finance films in India.

Apart from traditional sources of revenue, such as sale of theatrical, satellite, merchandising and music rights, newer sources of revenue have emerged primarily in the digital/non-linear domain. In certain cases, these revenue sources perform independently of how the movie does at the box office. Producers should factor in these sources of revenue while preparing their proposal to seek funding from banks and other financiers. The financiers may seek lien on such revenue sources, which can limit their risk of recovery associated with the performance of the film.

nitn-zanwarNitin Zanwar, Head of Finance, Junglee Pictures

Apart from the core issues that the industry has been facing – piracy, low average revenues, poor infrastructure and inflation – a new challenge in the form of taxes has emerged over the last decade. Both direct and indirect taxes have their own impact on the business of the industry.

Under the direct tax regime, higher income tax and withholding tax rates are creating cash blockage on one hand, and also posing imminent problems for legal agreements on the other.

However, it is indirect tax that is causing big-time problems for the industry. Given the central and state structure of taxation in India for the levy of indirect taxes, the film industry is subjected to multiple taxes at various points in its supply chain, without availability of credit in most cases. On transfer of copyright, service tax is levied by the central government, VAT is levied by state and entertainment tax is levied by local civic bodies on exhibition. None of these taxes can be settled-off against the other.

What further adds to the problems is that you cannot take full credit of the huge service tax paid against the service tax payable owing to inherent restrictions in the said law. This cascading effect is adding to the costs and eating the margins substantially. Further, continual reforms in taxes over the years have only made the compliances more cumbersome.

From the next financial year, the current indirect tax regime in India will be replaced by a comprehensive dual GST to be levied concurrently by the central government (CGST) and the state governments (SGST). However, from the basic analysis of the proposed modal law, it appears that the road ahead for the industry is still potholed as there is sufficient room for manoeuvring. Let’s wait and we’ll know how the final law unfolds and impacts the industry.

On the other hand, getting finance had been an issue for the industry. However, the advent of studios in  Bollywood has helped the industry explore new avenues of sourcing finance such as market equity, private investors, continuous line of credit from banks and the alike. However, for individual producers, this is still a distant reality and they have to resort to traditional sources of finance which are super expensive.

jayantilal-gadaJayantilal Gada, Producer   

It is true that banks usually don’t finance films very easily but that’s because filmmaking is a very risky business. Returns are not guaranteed even if you have the biggest star in your film. At PEN, we have been lucky to have been supported by Yes Bank, which has given us loans. That’s also because we have been in the industry for a very long time and have a clear balance sheet. The bank will provide you loans depending on whether or not you can repay them. Since they don’t loan you their own money but the public’s money, they have to doubly make sure they can recover the loan.

Contrary to the myth that they prefer not to extend loans to filmmakers, they do finance films made by big production houses. They carefully scrutinize the studio’s balance sheet and track record before financing. I believe they are fully justified in being cautious as filmmaking is a creative business and one needs to understand it in order to make money.

anjum-rizvi-2Anjum Rizvi, Producer

There were only a few banks that used to finance films and even they have become very choosy. They only back films with a big star cast, made by a large production house. They do not back niche subjects with newcomers.

I have produced six films but, with every film, I still have to struggle with finance. In spite of having A Wednesday! under my belt, things haven’t changed much. This is a very fickle business and there are no guaranteed returns when you make a film. Films which feature A-list actors too fail at the box office. You simply cannot tell which film will work and which will not.

This is a very sad situation for filmmakers, especially small filmmakers. Filmmaking is a tricky business and banks look at balance sheets and your account should be clear. For instance, they have stopped financing the real estate industry even though they know the building will be sold and they will make money but because builders have not repaid their loans on time, banks have stopped financing small-time real estate developers. Filmmaking is a collaborative process, so everyone from exhibitor to distributor to producer has to come together to make a film possible.

How do you expect banks or the government to support us when we ourselves don’t support each other? There is no unity in this industry. When a big film is releasing, every exhibitor goes all out to promote it whereas they don’t assign more than three shows to a small film.

The problem with bank finance is that they need to make sure they recover the money they lend you. If you mortgage your house, they will happily finance your film. They need to know the return on investment, which a film does not guarantee. Hence filmmakers, especially new filmmakers, don’t get bank finance.

Alternatively, the government could do its bit by offering us some subsidies, which will ease our financial burden. We were given ‘industry’ status but we are still not counted as an industry. That needs to change.

ronnie-lahiriRonnie Lahiri, Producer

From Vicky Donor, to Madras Cafe, to Piku, we have never approached banks for finance. But banks have their rules and regulations and if you fulfill their requirements, you will be able to secure a loan from them. When we apply for a housing loan or a personal loan, don’t they check our credentials to assess whether or not we can repay the loan?

Similarly, when you ask a bank to finance your film, they will look at your credibility and balance sheet and track record. They are there to give loans but also recover those loans. Banks work on deadlines, like recovering EMIs on specific dates, periodically. So, say, your film gets delayed, banks will not accommodate the delay.

Banks are financing television shows these days because they see the returns, they see cheques coming in on time. But they don’t see returns in the filmmaking business and that’s why they provide loans only to producers whose credentials they recognise. The government has given us an industry status. What more could we ask for? As an industry, we need to get our act together when it comes to work culture. After that, everything will fall into place.

yes-bankKaran Ahluwalia, Senior President & Country Head - Media & Entertainment, Luxury and Sports Banking Group, YES BANK

1.Has Yes Bank slowed down on film financing and, if so, why?

YES BANK has been one of the pioneers in the Media & Entertainment banking in India through our knowledge banking approach and is a banker to most of the reputed corporate in this segment. The bank continues to play a caliberated role in film financing. We evaluate each project based on our knowledge banking expertise and experience in the media and entertainment industry - including film entertainment, broadcast, print and other ancillary M&E verticals and put in place relevant ring fencing structures.

2.Generally speaking, why are banks reluctant to finance films and what can the film industry/ producers do to ease banks’ reluctance?

Since the film industry is not a conventional brick & mortar one, there are specific customsed issues to keep in mind. One of the major factors is that the cash flow predictability is non-linear, and therefore financial institutions usually find it difficult to fund films. This can be addressed by the Industry/ production houses by ensuring greater transparency of the cash flows, and ensuring market & financial credibility which could aid the financing process.

3.Are there any specific criteria that a production house should keep in mind before applying for a loan?

There is not one single criteria but a multitude of factors which are thoroughly evaluated on a case-to-case basis. At YES BANK, we generally tend to look at production houses/ distribution houses that have significant vintage value, credibility and track record in the industry. A similar yardstick is also applicable for financing projects.

4.What sort of collateral do banks typically expect from those applying for film loans?

The collateral is also dependent on the merits of a particular case. It is a combination of the factors mentioned above.

5.What is your outlook for institutional finance in the coming years?

Institutional finance looks neutral to positive in the coming years. The industry should ensure that they take relevant and encouraging steps to increase the pie of organized capital and boost the confidence of banking institutions to support this vibrant industry.

apoorva-mehta22Apoorva Mehta, CEO, Dharma Productions

The biggest irony in this domain is that the government recognizes us as an industry but the financial sector doesn’t. We have come a long way in the last three to four years. For example, paperwork is more structured today. Everything is backed by adequate paperwork to prove commercial transactions between two individuals on a particular matter. In that sense, things have evolved but banks are still skeptical, and I think that one can’t blame them because they have no way of valuing or evaluating a film project.

This is the only business where past performance is no indicator of future performance. There is no pattern to suggest that an actor’s track record will lead to success in future ventures. There is no way to predict performance and quantify risk in this business. Every project is unique and the risk that every project carries is unique. There are no benchmarks or parameters to examine creativity and this space is driven by subjectivity.  So the only thing banks can do is loan money to production houses that have got it right more often than not, and whose track record speaks more than that of an individual film. We have seen big star cast films flop and small films doing surprisingly well. So it is a toss-up, really.

These problems are not exactly universal because internationally, they have bonded finance schemes. There are films that are bonded and the producers need to commit by ensuring they complete the film in a certain number of days by following certain processes. This essentially helps financial institutions understand the risk involved and helps them de-risk themselves when lending money. There is an insurance premium that covers the risk. We are far away from that. But as filmmaking gets more and more expensive, I am sure banks will step in.

ratan-jain-2Ratan Jain, Producer

I have been securing bank funding for my films for a very long time. The point is that, to secure a bank loan, a producer has to fulfill certain conditions. Earlier, banks used to offer loans against the negative of the film. So if you could not repay the loan, your film would not release.

Today, too, they have conditions, where they ask for assets as collateral against the loan. So, if a producer is ready to mortgage his or her house or anything else, they will be able to get a loan. Earlier, producers were passionate about making films whereas, today, it is about making a ‘project’.

Take, for instance, the trend of making a film and then selling it to a corporate house. So, for example, if a producer is making a film on a budget of `45 crore, he sells it to a corporate house for Rs.55 crore, and he makes a profit. Now corporate houses are in trouble because they didn’t have enough understanding of the film business.

What happens with the film business is that there is no guarantee to recover your investment. The success ratio of our industry is seven per cent, which is why banks are not willing to part with money easily.

Let me draw form my own experience. I had taken a bank loan for my film Tezz but I repaid the entire sum just before the film released. So, even if the film didn’t do well at the box office, it became easier for me to seek bank finance for my next film as I had repaid the earlier one on time. So it is incorrect to say that banks don’t want to finance films.

As for the government, it cannot help you. The have given Hindi cinema industry status. What more can they do?

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Amar Butala, COO, Salman Khan Films

The green-lighting and revenue model of our films is still a work in progress when compared to the West. Our green-lighting process is driven by sentiment rather than data. While green-lighting a film, studios in the West clearly benchmark it to previous films by genre, cast, release date and several other parameters to arrive at a probable revenue number.

In India, we have limited box-office data and even less data on revenue from non-theatrical platforms. So producers in India don’t have the ‘science’ that studios in the West have. In fact, we have started getting dependable data only in the last few years.

Similarly, the syndication process is far more evolved in Hollywood, where rights are not bundled for no value, rights have fair windowing. So a given right can be monetised several times over. There is, of course, no concept of perpetual deals and annuity income is one which is accounted and calibrated while green-lighting a film. Theatrically, too, they have abundant clarity on their box-office number and reporting is clear.

In India, transparency in the theatrical business with the advent of multiplexes has improved. With newer platforms on television, mobile phones and the Internet to consume films, producers are now recognising the value of ancillary rights, which earlier we weren’t able to monetise.

Lastly, several producers have output deals with broadcasters and music companies. This means a considerable cost of a film is now underwritten. With this transparency, newer sources of revenue and output deals, the next step might be institutional funding.

Already, we do have a some banks that will undertake slate funding or bridge funding for certain producers. We are still many years away from banks underwriting our films completely because the business still is largely speculative for them.

pradeep-jaiswaPradeep Jaiswal, GM, Finance, Reliance Entertainment 

a) Taxation

The film industry was bleeding with various levels of cascading and dual taxation with very limited options to take credit of the input taxes. Almost 50-60 per cent of the ticket price was going towards paying Entertainment Tax, Service Tax, VAT, etc, eating into the margin of the producers/studios.

Reduced margins keep the hands of producers tied, which in turn results in restricting creativity. With Hollywood breathing down the neck of Bollywood films, it is important that every rupee of the budget goes into visual content.

With the advent of GST by next year, the industry not only hopes the effective tax rate and cost will rationalise but also expects ticket prices to come down, resulting in more footfalls in cinema halls too.

Another aspect is the high withholding tax rate on hiring of professional talents and equipment from overseas. Since these talents want their payment net of any taxes, the tax burden shifts to the producers, adding to their woes.

b) Financing

Over time, most Banks/NBFCs have become reluctant to finance individuals and smaller producers due to NPA issues and some financed films not seeing the light of the day. Only some corporate/large production houses which have a good track record in loan servicing have enjoyed the trust of banks. Others have to depend on unstructured loan sharks to bail them out at high cost, which eats into their budget.

Lately, various international film funds have shown interest in Bollywood films and are prepared to invest but they expect Bollywood to adopt international standards and transparency in their functioning, such as Production and E&O insurance, completion guarantee bonds, bound screenplay, detailed transparent budgets, etc.

c) Tax Rebate

Last year saw many new countries eyeing the Indian film business by providing various tax incentives. Malaysia, Georgia, Canada, Mauritius, Hungary, Bulgaria and Fiji have emerged as a new tax-incentive hotbed. This is over and above tried and test countries such as the UK and the US, and they together are taking away business from the Indian market.

vashu-bhagnaniVashu Bhagnani, Producer

I don’t think there is an issue in getting finance from banks. One should be credible enough to get the loan to make a film. Obviously when you apply for a loan, the bank checks your company’s balance sheet, track record and assesses whether your company will be able to repay the loan. So they check the producer’s credibility. I have never encountered any problems securing bank finance for my films.

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