Infrastructure finance

Traditionally, government has been the sole financier for all infrastructure projects along with the responsibility for implementing projects, operations and their maintenance. Then due to raising needs of infrastructure finance it became recognizable that this method is not enough, neither the best way to execute/finance such mega projects.

Then the government took several attempts for creating an environment for the private players in infrastructure development sector within the country. Generally, infrastructure finance has to be for the infrastructure project which depends on manufacturing projects, expansion and modernization projects that are carried out by infrastructure undertakings in India. Infrastructure finance is considered to be highly capital intensive and entails longer maturity along with higher risk and prolonged real rate of returns.

Institutional finance for Infrastructure sector

Banks and Financial Institutions (FIs) are considered to be open for financing technically feasible, financially viable and bankable projects which are undertaken by public as well as private sector undertakings.

However, before getting finance, it is pre-requisite to take relevant measures as follows:

1. Funds provided should be within the overall ceiling limits as described within the prudential exposure norms formed by Reserve Bank of India (RBI) for infrastructure finance.
2. Banks or financial institutions must have requisite knowledge for appraising technical viability of the projects which falls under infrastructure financing.
3. Providing finance for infrastructure projects through term loans, Banks and financial institutions have to conduct due diligence regarding the viability and bankability for such projects for ensuring efficient utilisation of resources along with the creditworthiness of the projects being financed.
4. Banks and finance institutions may lend for special purpose vehicles within the private sector, registered under the Companies Act for undertaking financially viable infrastructure projects and to not act as intermediaries for providing infrastructure finance.

The supply of funds does not seem to be in short supply for infrastructure finance; there exists a need for an extra layer of credit enhancement that can absorb the associated risks with infrastructure financing. It also gives rise to situations for involving intermediaries, instruments and markets which can perform risk functions effectively, maturity and duration transforming to suit the desires of the investors.

Sources of infrastructure finance

1. Domestic sources

Equity funds

• Domestic investors
• Public utilities
• Dedicated Government Funds

Debt funds

• Domestic commercial banks (for 3-5 year tenor)
• Domestic term lending institutions (for 7-10 year tenor)
• Domestic bond markets (for 7-10 year tenor)
• Specialized infrastructure financing institutions like infrastructure debt funds

2. External sources

Equity funds

• Foreign investors
• Equipment suppliers
• Dedicated infrastructure funds
• Other international equity investors
• Multilateral agencies

Debt funds

• International commercial banks (for 7-10 year tenor)
• Export credit agencies (for 7-10 year tenor)
• International bond markets (for 10-30 year tenor)
• Multilateral agencies (over 20 year tenor)

The Government and the RBI had made the following efforts in order to attract investment into the infrastructure finance sector:

1. Set up of India Infrastructure Finance Company Limited (IIFCL).
2. The National Investment and Infrastructure Fund (NIIF) has also been approved in order to extend equity support for the infrastructure Non-Bank Financial Companies (NBFC).
3. Issuing of rupee denominated bonds within the overseas markets.
4. Infrastructure bonds to be issued by IFCI (Industrial Financial Corporation Limited), LIC, and IDFC (Infrastructure Development Finance Corporation) along with tax deduction incentives for the individual taxpayers.
5. RBI promotes bank lending specifically for the infrastructure sector.
6. Viability Gap funding
7. Using foreign exchange reserves for large infrastructure projects through (IIFCL)
8. The RBI has categorized infrastructure lending NBFCs within a special category as well as allowed concessional type of operations for them.
9. The central government has increased its allocation for the infrastructure sector in each budget. The 2016-17 budget allocates nearly Rs 2 lakh crore including road sector itself getting Rs 70000 crore funds from the budget.
10. FIIs are permitted to invest in infrastructure debt funds. In spite of this QFIs are constantly encouraged for making investment in this sector especially through financing of bonds.
11. Take out financing scheme.
12. Green bond scheme.

Benefits of infrastructure finance

• It allows promoters to undertake projects without exhausting their ability of borrowing amount for traditional projects.
• Limits the financial risks of a project to the amount of equity invested.
• Provides stronger measures for project evaluation and risk assessment.
• Facilitates the projects to undergo careful technical and economic review.
• Removes the dependency of project over an alternative nature of funding.
• Enables the diversification of the project sponsor’s investments to reduce political risk.
• Access to prolonged credit opportunities.
• Matches specific assets with specific liabilities.