Allowing banks to set up infrastructure debt funds (IDFs) will give the infra sector an added fillip. Or will it?Finally, banks can get completely rid of their limits imposed by asset liability mismatch (ALM). Although schemes like take out financing exist and there have been numerous attempts to revive the corporate bond market, most of the schemes and efforts seem to have gone in vain.The government has now issued guidelines for banks to set up infrastructure debt funds that can either be structured as a non-banking finance company (NBFC) or a trust that will function like a mutual fund. The Reserve Bank of India (RBI) seems to be quite ambitious in allowing banks to set up infrastructure debt funds for financing long gestation projects. Earlier, RBI had reservations over allowing banks to get into infrastructure financing through debt funds. However, looking at the ambitious figure of $1 trillion investment into infrastructure in the 12th Five Year Plan, the policy makers are left with few options in deploying such humongous funds. The guidelines are likely to require banks promoting infrastructure debt funds in the non-banking finance company (NBFC) that will be an offshoot of the bank itself.The CatchThough this move may create positive ripples in the infrastructure sector, the tougher regulatory norms might come in the way of a smooth journey. Banks feel the prudential regulations are cumbersome entailing the formation of an NBFC. The infra debt funds will be required to obtain a minimum 'A' credit rating and maintain a capital adequacy ratio (CAR) of 15 percent. These debt funds will need to have net owned funds of over Rs 300 crore. Banks cannot invest in mutual funds by infra debt funds floated by them. The RBI is also likely to mandate that greenfield investments will be limited to only those projects that will be executed in the PPP mode. In the case of purely private venture, the debt funds will be able to lend to only those that have been in the commercial production for at least one year.The Flip SideFears of declining foreign direct investment (FDI), low government spending last year, buoyant interest rates and high raw material costs have forced investors reduce investments in infrastructure and allied sectors. High interest rate and rising project financing costs are pushing several mid-tier infra companies into a deep debt crisis situation, according to equity analysts.Infrastructure funds have been the biggest casualty of the recent stock market downturn. Bleak sector outlook and underperformance of funds have prompted investors to redeem about Rs 3,500 crore from core sector funds over the past year. Industry estimates show that top infra funds have lost Rs 400-940 crore since June last year.Foreign investment in Indian projects is an area of concern these days. The FDI flow in the financial year 2010-11 was 28.10 percent lower than that of financial year 2009-10. The recent US crisis and the cold western markets in general may further slow down the FDI inflow. Focusing GrowthIn spite of the current slow growth conditions, a rebound of the infrastructure sectors in the near future is not impossible. Fund managers expect the government to restart funding core projects once inflation is under control. National Highways Authority of India's (NHAI) Rs 5,000-crore bond issuance, expected to hit the market this month, will improve sector sentiment, they say. A number of projects have recently been awarded, especially in road and power sectors. NHAI's road development plans and power ministry's plans to set up more ultra mega power projects (UMPPs) will provide the much needed shot in the arm of infrastructure development activity in the next few years.Considering the huge infrastructure market potential in the country, allowing banks to set up infrastructure debt funds for financing long gestation projects seems to be a good move in this direction.