HR Khan, Deputy Governor, Reserve Bank of India (RBI) called for steps to encourage insurance companies, pension funds, provident funds, and other institutional investors to invest in bonds issued by infrastructure firms.
Presently, the insurance and pension funds are legally required to invest a substantial proportion of their funds in government securities. These investment requirements limit their ability to invest in infrastructure bonds.
Further, they can only invest in a blue chip stock, which is also acting as a limiting factor since most of the special purpose vehicles created for infrastructure funding are unlisted entities, explained Khan while addressing an event.
Widening investor base is one of the pre-requisite for improving depth, liquidity and vibrancy in the corporate bond market. Developing corporate bond market would enable raising of finance and reduce dependence of infrastructure companies on the banking system.
There is also a need to offer adequate risk mitigating financial products, such as, credit default swaps, Khan said.
He also asked banks to upgrade their project appraisal and follow-up capabilities so that project viability can be properly evaluated and risk mitigants provided where needed.
Infrastructure projects involve huge financing requirements, most of which are met by banks and other financial institutions directly and indirectly. Thus, it is very important to make the project commercially viable to ensure regular servicing of the loan, he said.