S Vishvanathan, MD and CEO, SBI Capital Markets, explains why the regulators of IDF have taken a rather cautious approach in developing it, and suggests that banks can take on the initial risk and then pass it on to IDFs-thus retaining the asset throughout the project.
Banks have been contributing a large share in the infrastructure investment. The major funding, however, has been accomplished through budgeÂtary support, constituting around 45 per cent of the total infrastructure spending. The debt from commercial banks, NBFCs, insurance companies and the external sources constituted around 41 per cent of the funding while the balance 14 per cent was through equity and FDI.
Infrastructure Debt Funds (IDFs) have been conceÂptualised to facilitate a bond market for infrastructure projects in the country which will provide some cushion for the already stretched banks' exposure to infra sector. These debt funds will 'take out' a major part of the term loan from infrastructure projects, thus releasing the banks' committed funds which can be deployed further in other avenues. The idea behind IDF is to attract investors like pension funds from India and overseas as well as sovereign funds for infrastructure funding of the country.
The objective of IDF was to develop a bond market for Indian infrastructure projects and to attract diverse investors. In this regard, two structures have been finÂalised for the IDF.
IDF as Mutual Fund (Trust route): In this struÂcture, an asset management company will be incorporated to deploy the corpus raised from investors in the infrÂastructure projects. SEBI has already amended the Mutual Fund guidelines to facilitate this structure.
Banks and NBFCs would be eligible to sponsor IDFs as Mutual Funds with prior approval of RBI. Banks acting as sponsors to such MFs would be subject to existing prudential limits including limits on investÂments in financial services companies and limits on capital market exposure.
IDF as NBFC: RBI has recently released broad guidelines for the IDF which can be floated as NBFC by the Indian banks or NBFCs.
Both the regulators-SEBI and RBI-have taken a very cautious approach for development of this structure. As a starting point, it is a good mechanism for creating an alternate source for debt funding in the infrastructure space. Going forward, the regulators will have to monitor the evolution of this structure very closely and they may have to alter some conditions for scaling up.
There are some fine prints for the original lenders of such projects also. Since IDF will be taking out not more than 85 per cent of the loan, the balance will remain with these banks only. Banks' remaining loan to the borrower is liable to be treated as unsecured because of subordination to the IDF resulting in an increase in banks' unsecured advances.
Bound by boundaries
Currently, RBI has allowed the IDF to invest only in PPP projects which have completed one year of successful operation. At present, Indian financial sector doesn't have a well developed corporate bond market. This fund has been conceived as a stepping stone for developing a vibrant corporate bond market in India in future. To attract investors for this IDF with very
low cost of funds, it is imperative that investment portfolio of IDF has very good rating.
Thus, IDF will be investing only in infrastrucÂture projects that are in the PPP space and which have successfully been in operation for at least one year. It is being considered that IDF should become a party to a Tripartite Agreement with the concessionaire and the Project Authority for ensuring a compulsory buyout with termination payment. IDF will not subscribe to more than 85 per cent of the loan for which buyout will be guaranteed and it will have priority over the original lenders. This will enhance the credit rating of IDF which will help it in getting investors with low return expectations. All this will help IDF to keep its cost of fund lower so that the eligible infrastructure projects get alternate funding at a cheaper rate. As a launchpad, this seems a moderate strategy which can be liberalised as we make some progress in the desired direction.
RBI has allowed the Banks to float the IDF through both the routes. Banks can act as a nodal agency for development of IDF as an NBFC. Large banks can float such funds that can complement their strengths in project appraisal. Once the asset becomes risk free, they can pass on the asset to the IDF. For smaller banks, it will be difficult as they have to comply with the limit set by RBI for investing in all subsidiaries and non-subsidiary financial services companies which is 20 per cent of paid up capital and reserves. Banks can use their appraisal skills to churn the portfolio. A major portion of banks' funds deployed in the project will get released and will be available for further advances. This loan churning provides opportunities for additional fee income also by doing other transactions.