Infrastructure development is getting focused attention of the Modi-led Government as it grapples with the challenging task of rebooting the economy so as to take it to a high growth trajectory. Playing a crucial role in the infrastructure financing space is state-owned India Infrastructure Finance Company Ltd (IIFCL). SB Nayar, who has been at the helm of IIFCL since December 2013, spoke to BusinessLine on the company’s current role in infrastructure development. Excerpts:
There has been a lot of focus on infrastructure sector by the government. Do you see any visible changes in the operating environment your company is working in?
Yes, there have been significant changes in IIFCL’s operating environment. Until recently, IIFCL could lend only as a secondary lender and sanction loans only on the basis of appraisals made by other banks/FIs. However, the Centre has now allowed IIFCL to be the lead lender and sanction loans based on its own appraisal. We are currently evaluating our resources and have initiated the process of capacity building to be able to assume the role of a lead lender.
Earlier, we could lend only to projects with a minimum average maturity of 10 years. However, keeping in view the 5/25 scheme, IIFCL can now lend to projects even with five years of average maturity. Not only this, we can now lend up to 40 per cent of our total lending in any accounting year to private sector projects not selected through competitive bidding, up from 20 per cent earlier.
The government has also approved a Regular Credit Enhancement Scheme, under which IIFCL can now enhance the credit rating of projects to AA or above levels. A Revised Refinance Scheme was also put in place recently, where refinance may be based on the prevailing liability profile of the institution, and not the project, with the minimum tenor being at least one year.
This will allow IIFCL to effectively manage its surplus cash through this scheme. Further, IIFCL can now raise shorter tenor debt and operate an active treasury. These measures are expected to reduce the cost of funds for the company and make its operating environment far more dynamic.
How do you see these policy changes impacting India’s infrastructure sector?
The changed norms will give IIFCL more flexibility in lending and enlarge its role in the infra finance segment in the country. An active treasury as a result of these policy changes will allow IIFCL to lower its cost of funds. This will enhance its capacity to lend at lower rates, which is extremely significant and critical to the infrastructure sector.
How was 2014-15 for IIFCL? How do you see IIFCL contributing to India’s infrastructure sector?
Despite the turbulent times that the infrastructure sector is going through, IIFCL has managed to increase its sanctions under direct lending in 2014-15 (till December) by a substantial 300 per cent over the last year. For the half year ended September 2014, IIFCL recorded a net profit of ₹389 crore, a 64 per cent increase over the corresponding period last fiscal.
Unlike the general trend, our gross non-performing assets (NPAs) are expected to come down over the past year. IIFCL’s contribution to the infrastructure sector, at about 3 per cent, is low. With the fresh impetus provided by the government, we are positive about our growth and our ability to contribute to India’s infrastructure sector far more significantly.
In Budget 2015-16, the Finance Minister announced the formation of the National Infrastructure Investment Fund (NIIF). How will it impact infrastructure development in the country?
There is a dearth of equity capital for setting up projects in our country. Availability of debt through banks may become scarce since many of them are reaching sectoral caps. Once the Basel-III norms kick in, banks may further step back from lending to greenfield infrastructure projects due to increased capital requirements.
The creation of the NIIF is definitively a positive step towards mobilising the much-needed resources, both equity and debt, for the infrastructure sector.
The objective of NIIF would be to leverage government contribution and invest in infrastructure financing institutions and in critically important infrastructure projects. Such funds could further be leveraged many times for raising resources to meet the funding requirement of the sector. This would be more efficient than investing directly from the Budget.
The government set up a working group under your chairmanship to examine the suggestions made by Association of Power Producers (APP). What is the status of the recommendation made by the Committee?
The Committee submitted its report to the Department of Financial Services in November 2014. The RBI has already come out with guidelines on flexible structuring of loans (5/25 scheme) even for existing projects, including sub-standard loans, which was one of the recommendations of the committee report. The existing projects have had the disadvantage of getting term finance for far shorter period compared to the economic life of the project.
This resulted in tight repayment schedules and reduced the projects’ ability to withstand fluctuations in cash flow, especially under a deep stress scenario as is prevailing today. Allowing the existing projects to utilise the 5/25 structuring would help align the debt repayments with the cash flows and spread the debt servicing over the economic life of the project. This would, in turn, increase the investible surplus and lead to tariff reduction for the end user. Other recommendations are also under examination.