Investments worth close to Rs.2.5 lakh crores to flow on infra projects between 2014-15 to 2017-19 through External Commercial Borrowings (ECBs) route following RBI’s easing of norms on ECBs raised by infrastructure companies.
A White Paper brought out by PHDCCI and CRISIL on Infrastructure Financing also projected that investments requirement of infrastructure projects would be met through issuance of bonds to an extent of Rs.7 lakh crores during the period.
It is estimated that Rs.26 trillion of investments between 2014-15 to 2017-19 from multiple sources would have to be generated to finance the entire infrastructure needs of the Indian economy, over two-third of which be funded through debt, with banks remaining the largest source of financing.
Releasing its findings, the Co-Chairman, Roads, Ports and other Infrastructure Committee of PHD Chamber Mr. Manas Agarwal said, “so far, banks have contributed to nearly half of the debt funding for infrastructure projects. Over the past ten years, bank lending to the infrastructure sector has grown at a CAGR of 36 per cent, much higher than the overall credit growth of 22 per cent. And the share of bank credit in this space has risen from 4.8 per cent in 2004 to 14 per cent in 2014. This rapid growth in lending to the infrastructure sector poses the risk of an asset-liability mismatch given that the infrastructure project loans have long tenures of 10 to 15 years while bank deposits, the main source of funds, typically have a maturity of less than 3 years. Moreover, several banks are also nearing the group exposure limits set by RBI for lending to large infrastructure players”.
Large investors like pension funds, provident funds and insurance companies have large corpuses but are restricted by regulation to invest only in highly-rated debt. There is therefore a need to bridge the gap between the low risk appetite of institutional investors and relatively high credit risk profile of infrastructure projects. There are various types of credit enhancements that should be deployed to match the investor risk-appetite such as partial guarantees, securitisation of road project cash flows, infrastructure debt funds (IDFs) and partial credit enhancement facility for corporate bonds.
Mr. Agarwal pointed out that partial guarantees can help in raising the credit quality of the debt issued by the project special-purpose vehicle (SPV) to levels bond market investors are comfortable with India Infrastructure Finance Company Limited (IIFCL), a government owned enterprise set up to provide long term funds for infrastructure projects, provides partial guarantees to enhance the ratings of the bonds issued by infrastructure companies.
He also said that partial guarantees thus help improve the rating on the instrument from the issuer’s rating towards the guarantor’s. The level of enhancement depends on factors such as coverage, timing and nature of the guarantee, the extent of cash flow recoveries that can be expected post delay/default by the issuer, and the legal and payment structure.