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India should develop new instruments and mechanisms, such as credit enhancement, to raise finance for infrastructure projects.
This was stated by the Union Finance Minister, Mr Pranab Mukherjee, after the launch of IIFCL's credit enhancement scheme in the capital on Thursday.
The scheme would provide an opportunity for long-term funds flow from institutions such as insurance and pension funds, Mr Mukherjee said.
This alternative mechanism of fund availability to infrastructure project developers would go a long way in the development of infrastructure bond market as it would lead to creation of a class of investors like LIC, other insurance companies and pension funds, he added.
Through credit enhancement, a lender is provided with reassurance that a borrower will honour the obligation through additional collateral or third party guarantee. It reduces credit/default risk of a debt, thereby, enhancing credit rating and lowering interest rates on the debt.
Mr Mukherjee also handed over to GMR Jadcherla Expressway, a SPV of GMR Group, an approval letter from IIFCL for the first pilot transaction under the credit enhancement scheme.
Meanwhile, IIFCL entered into memoranda of understanding with seven major public sector banks, LIC and HUDCO to speed up of the process of financial closure of viable infrastructure projects and ensure smooth flow of funds into the sector.
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