Centre plans dedicated fund for infra finance

 The government has decided to set up a dedicated fund of Rs.10,000 crore to provide credit enhancement for commercially viable infrastructure projects.
About this fund:
SPV route

• The dedicated fund will be in the form of a Special Purpose Vehicle (SPV) and will be categorised an NBFC-Infrastructure Finance Company.
• Its promoters are likely to include Life Insurance Corporation of India (LIC), General Insurance Corporation of India, State Bank of India, Bank of Baroda, Power Finance Corporation, Indian Renewable Energy Development Agency and India Infrastructure Finance Company Ltd (IIFCL).
• The government is keen on roping in international financial institutions such as Asian Development Bank, Asian Infrastructure Investment Bank, New Development Bank (formerly BRICS Development Bank), International Finance Corporation (World Bank Group), and talks are on in this regard, sources close to the development said.
• The initial minimum paid-up capital will be Rs.500 crore.
• The SPV will issue an array of credit enhancement products that will initially cover post-Commercial Operations Date (COD) projects (where construction is over and commercial operations have begun, with the project generating cash flows), and subsequently even the pre-COD projects (where the construction process is on).

Bond market

• The government asked the state-owned IIFCL, which already has a credit enhancement scheme and is in the infrastructure finance business, to work on the fund and provide inputs to the RBI for firming up a regulatory framework after studying the prevailing credit enhancement facilities in countries such as the U.S., Canada and even Indonesia.

State-owned insurers

• The public sector insurers, leading state-owned banks and multilateral lending agencies are being made part of the large fund as it needs deep-pocketed promoters with an understanding of the risks involved in investing in the infrastructure sector — where projects have huge capital needs, but with long-gestation periods and returns coming in slowly.
• The fund/SPV will charge a small fee, and the fee structure will depend on the difference in interest rates between the rates offered by banks and that in the bond market (with a lower interest rate than the bank rates).

Analysis:

• The fund — through ‘unconditional and irrevocable partial credit guarantee’ — will help enhance the credit rating of bonds issued by infrastructure firms so that they, in turn, can attract long-term investments especially from global insurance, pension and sovereign wealth funds.
• Besides, a majority of the around 1,500 infrastructure projects in the country in various stages of development are rated at BBB-level, and the dedicated fund can help enhance this rating and help them raise more funds, especially from overseas investors who invest only in higher-rated (AA) projects.
• The country infrastructure sector requires investments of more than $1.5 trillion in the coming ten years. The development follows the announcement in the Budget 2016-17 on the proposed measures to deepen the corporate bond market.

By: Vishal