Bank lending to the infrastructure sector has been slowing. But infrastructure debt funds (IDFs), conceived to provide an additional funding source for infra projects, have been tapping into pools of private capital over the last three years.

Three IDFs set up through the NBFC route — L&T IDF, India Infradebt and IDFC IDF— have grown their asset base from around ₹600 crore about two years ago to over ₹9,000 crore in the current fiscal.

These funds are still tiny in the larger context of banks’ lending exposure to the infrastructure sector. But the RBI expanding the scope of projects that can be financed under the IDF-NBFC route in 2015 has led to a steady increase in the income and profit of these funds.

In fiscal 2016, L&T IDF’s profit after tax stood at ₹39.3 crore on a total income of ₹114 crore, a growth of 30 per cent and 99 per cent, respectively, over the previous year.

India Infradebt reported a profit of ₹29.2 crore on total income of ₹143.2 crore, a rise of 34 per cent 128 per cent, respectively, over the previous fiscal.

For the six months ended September 30, 2016, L&T IDF’s profit was ₹45.3 crore on total income of ₹149 crore and India Infradebt’s profit came in at ₹21.1 crore on total income of ₹146.7 crore. L&T IDF and India Infradebt commenced operations in 2013, while IDFC IDF completed its first year of operations in FY16.

Preferred route

An IDF can be set up either as a trust or company. A trust-based IDF is a mutual fund that issues units to investors and is regulated by SEBI. Under the company-based format, the IDF is an NBFC that issues bonds to investors. So far, three infra debt funds have been set up through the NBFC route and three through the MF route.

While all IDF-NBFCs put together have asset base of over ₹9,000 crore, IDFs under the MF route (IIFCL, ILFS, Srei) have assets of just about ₹2,000 crore. One of the key advantages of IDF-NBFCs, that has helped draw investors, is they are allowed to invest only in infrastructure projects that have successfully completed one year of commercial production. Hence the,y do not carry construction risk.

Good rating

In case of the NBFC route, the money is raised through the issue of bonds, which are rated by a credit rating agency. Bonds issued by all three IDF-NBFCs have been rated AAA, making it easier for long-term investors, such as pension and provident funds to invest in them.

“IDF-NBFCs have been able to source long-term liabilities and therefore, do not face constraints in lending long term,” says Shiva Rajaraman, Chief Executive, L&T IDF. For example, L&T IDF has been able to raise funds with even 15- and 20-year tenor.

Over 80 per cent of L&T IDF’s outside liabilities in the form of bonds have been subscribed by insurance companies, pension and provident funds, adds Rajaraman. IDF-NBFCs get tax benefits that are passed on to customers. Income generated from deploying funds is tax-free.

“We are offering loans cheaper than banks. And more importantly we are offering long-term fixed-rate debt that few other lenders in the country can offer. This lowers the interest rate risk for the project and typically rating agencies give a higher rating for such projects,” explains Rajaraman.

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