India: Strong policy initiatives to spur infrastructure financing

Non-banking financial companies (NBFCs)-Infrastructure Finance companies (IFC) should be permitted to access external commercial borrowing (ECB) on liberal terms to make them globally competitive, reveals the ASSOCHAM-Deloitte study.

While releasing the study ASSOCHM Secretary General Mr. D S Rawat said, that NBFCs-IFC funding needs are limited to bank finance largely and the tighter prudential limits on bank lending and sectoral capps limited to access commercial bank funds.

“IRDA has set stringent guidelines towards investment in infrastructure bonds, the rating quality of investment bonds should not be less than AA whereas a typical non-recourse infrastructure project is rated BB. Moreover, 75 % of amount deficit investments in an insurance company’s portfolio (excluding government and other approved securities) must have AAA rating”, highlights the study.

Statutory restrictions imposed by government of India on infrastructure include minimum credit rating for deficit instruments and minimum dividend payment record of seven years for equity. ASSOCHAM as well recommends that these are difficult conditions for private infrastructure projects to meet as they have been set up recently and do not enjoy high credit rating in the initial years.

The study as well mentioned that the sale of unlisted projects is subject to capital gains tax which acts as a disincentive to most equity investors. There is as well a growing perception amongst the equity shareholders that the termination payments in the event of government agency defaults are not adequate in most concession agreements.

The PFRDA guidelines allow investment in credit risk bearing fixed gain instruments (Investment class C). However, at least 75% of the investment in this category is to be made in instruments having an investment grade rating from at least one credit rating agency.

The sartorial cap of 75% of the investment having an investment grade rating under Investment class C scheme, has led to Pension Funds missing on the opportunity to invest in infrastructure projects. As well the Sovereign credit rating of BBB- limits investments from foreign funds.

The lack of derivative market and interest rate that implies that investors are unable to manage risks efficiently. External Commercial Borrowings (ECB) imposes amount in cost ceiling that allows access only to highly rated companies. Financial intermediaries, such as banks, FIs, HFCs and NBFCs are not eligible to raise sums through ECB.

ASSOCHAM paper as well points out that almost one third of India’s saving rate of 37% is directed towards physical assets. As well, financial savings are not properly channelized towards infrastructure projects due to lack of long term savings options in the form of pension and insurance.

The foreign exchange hedging is not available for long tenures particularly for a period of additional than 8 years and even if they are available, they attract high premiums. Foreign investors are not comfortable betting on India for long tenures and this as well restricts the long term lenders to invest in these projects, adds the ASSOCHAM-Deloitte paper.

Mr. Rawat said that funding gap of around 6.08 lakh crores proposed in the twelfth five year plan should be assisted by the government through budgetary support.

ASSOCHAM further said that the government should play a pivotal complementary role of a facilitator, enabler and regulator to allay down the apprehensions of the private sector. It should introduce innovative financial instruments for risk mitigation and should additional closely align the nature of infrastructure development with funding sources. This will encourage private sector investment in infrastructure.