Infra debt funds can now finance more projects

The RBI has increased the scope of projects that can be financed under the NBFC-infrastructure debt fund (NBFC-IDF) route, by allowing funding of projects in the public-private partnership (PPP) segment without a tripartite agreement as well as to the non-PPP segment, as long as they have completed one year of operations.

This will ensure smooth flow of private financing into the infrastructure sector.

Banks, particularly state-owned ones, have been funding long-term infra projects. But increasing exposure to the sector has led to asset-liability mismatches and also added to the stock pile of stressed assets.

Last year, the RBI issued a number of guidelines in the form of flexibility in loan structuring and refinancing, and allowed banks to raise funds specifically for lending to the infrastructure sector without regulatory requirements, such as CRR, SLR and Priority Sector Lending targets.

The RBI has now allowed banks to lend to very long-term projects, with an option to refinance it periodically. Banks can, say, lend for a 25-year project with an option to roll it over after five years.

Hence, as the loan comes up for refinancing, it may be taken up by the same lender or a set of new lenders.

This is where infrastructure debt funds (IDFs) can help banks free up funds for deploying in new projects.

IDFs are investment vehicles which can be sponsored by commercial banks and non-banking financial companies (NBFCs) in India in which domestic or foreign institutional investors, specially insurance and pension funds, can invest through units and bonds issued by IDFs. An IDF can be set up either as a trust or as a company. A trust-based IDF is a mutual fund that is regulated by SEBI and issues units to investors. Under the company-based format, the IDF is an NBFC that issues bonds to investors. The NBFC-IDF is regulated by the RBI.

So far, three IDFs have been set up through the NBFC route and one through the MF route. L&T IDF, sponsored by L&T Infra Finance, is a leading infra-debt fund and has raised about ₹850 crore so far.

NBFC-IDFs have so far been a preferred route for raising funds.

These debt funds are allowed to invest only in infrastructure projects which are created through the PPP route and have successfully completed one year of commercial production.

Hence, they can finance road, port, airport and metro rail projects. As they lend only to operational projects, they do not carry any construction risk.

The other risk-mitigating features include a tripartite agreement between the project authority, the company and NBFC-IDF, and a compulsory buyout with termination payment, in case of a financial default.

The RBI has now proposed to increase the scope of projects under NBFC-IDFs.

This can make a huge difference in pooling private funds over the next three-four years. Currently, banks’ lending exposure to the infrastructure sector is over ₹9-lakh crore.

NBFC-IDFs are allowed to issue bonds and hence can leverage themselves. Given that they need to maintain 15 per cent of risk-weighted assets as capital, they can leverage themselves several times the equity base.

Hence, they can borrow more to lend more and so the cost of funds are cheaper.

The other attractive feature of IDFs is that the income they generate from deploying funds is tax-free. This too, renders the IDF a more cost-effective option.

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