RBI’s push for infrastructure financing

17 Mar 2010, 0259 hrs IST, DK Vasal & Gagan Sharma,
Source:ET
    
The finance minister has provided Rs 1,73,552 crore, constituting more than 46% of the total plan allocations for infrastructure development in
the country. And before the Budget, RBI took the mandate of ‘infrastructure push’ forward.

Based on the recommendation made in its second quarter review of the monetary policy, RBI classified Infrastructure Finance Companies (IFCs) as the fourth category among non-banking finance companies (NBFCs). It also laid down certain norms and eligibility criteria for qualifying as IFCs.

The basic requirements are a minimum net-owned fund of Rs 300 crore, and at least 75% of the total assets comprising loans and investments to infrastructure projects.

Soon after the Budget, RBI released appropriate regulations. On March 2, three circulars amending the external commercial borrowing (ECB) policy for facilitating development of the infrastructure sector and promotion of IFCs were issued. According to the Budget, companies can tap foreign funds for development of cold storage facilities.

Till now, the use of ECBs for on-lending was prohibited except for NBFCs exclusively engaged in financing the infrastructure sector. Since RBI has now introduced IFCs, the special dispensation for the NBFCs focusing on infrastructure has been taken back. Therefore, all NBFCs which propose to avail ECB for on-lending should get them categorised as IFCs. This creates incentives for such NBFCs.

It is noticed that financial institutions were going slow on infrastructure finance due to various characteristic difficulties with it, like long maturity, large fund commitment and high risks. One of the alternate methods of funding is the corporate bond market, but the bonds market in India is lacking liquidity and depth.

Hence, RBI has given a further push for domestic bonds and debenture issues by the infrastructure companies and IFCs. Now the credit enhancement facilities by non residents, which were available for the domestic structured obligations has now been extended to domestic debt raised through issue of capital market instrument like debentures and bonds by Indian companies engaged exclusively in the development of infrastructure and by the IFCs.

Now infrastructure companies and IFCs can take support of multilateral/regional financial institutions and government-owned development financial institutions like ADB, KFW, IMF for their bond issues. This could significantly increase the volume of bond issues by infrastructure companies and IFCs, as their debt issue will interest investors more due to support of these large foreign financial institutions.

These relaxations are not without restrictions. Identifying with RBI’s cautious approach, the restrictions are on minimum average maturity, prepayment, call/put options, guarantee fee and all in cost. With the relaxations and required restrictions, it is yet to be seen that how much interest these changes create among infrastructure players and whether these infrastructure entities will be able to garner support for their domestic debt issues from the particular foreign institutions.

Over the period of time, the government has tried various methods to improve funding of infrastructure sector like promotion of various development finance institutions like IDBI, IFCI, ICICI, PFC, IDFC and UIDF. But these institutions have not been able to support increasing infrastructure-financing requirements of the country. Therefore, there is a severe need for alternate sources for funding infrastructure projects.

The approach of the government, inter-alia, introduction of new category of NBFCs as IFCs appears to be another serious attempt of the government to promote infrastructure development.

The government has increased support to India Infrastructure Finance Company (IIFCL), which was started in 2006 primarily to provide long-term financial assistance to various viable infrastructure projects in the country. The FM announced that IIFCL’s disbursements are expected to touch Rs 9,000 crore by end March 2010 and reach around Rs 20,000 crore by March 2011.

Therefore, this current infrastructure financing push given by RBI will definitely support the financing requirements by increasing the financing options for the infrastructure entities like IIFCL.

(The authors are with DSK Legal. Views are personal.)