Building capital for infrastructure

It is heartening that both the World Bank and the IMF have predicted a higher growth for India over the next few years. For instance, from 5.6 per cent in the current fiscal, India is expected to grow by 6.5 per cent in 2016-17, according to the IMF. These figures would be even higher if they were based on the revised GDP data following the change made in the base year. Despite the optimism of both the IMF and the World Bank in Indian markets, it is important to note that the growth forecasts are triggered by hopes of a revival in industrial and investment activity, led by reforms at the Centre. It is evident that the only way to revive the economy is to kick-start infrastructure projects. While various policy initiatives hold the key to reviving the investment cycle, raising adequate resources for infrastructure development is just as critical. According to Crisil estimates, India will need ₹30 lakh crore over the next five years to build out infrastructure. Given that the Centre’s ability to spend heavily is limited, attracting more private financing has become imperative for long-term sustainable growth of the sector.

While banks, particularly State-owned ones, have been at the forefront providing the necessary funding, weak balance sheets continue to impede the financing of new projects. Although the RBI has issued a number of incentives in the form of flexibility in loan structuring and refinancing, this only partly addresses the issue. True, banks can now raise funds for lending to the infrastructure sector without regulatory requirements and also have an option to refinance loans periodically. This will help reduce the asset liability mismatch and the need to restructure loans. But this also triggers the need for a ready set of lenders at each stage of a project when it comes up for refinancing. This is where infrastructure debt funds (IDFs) can play an important role in freeing up some of the banks’ funds for new projects by refinancing the existing debt of infrastructure companies. IDFs are investment vehicles that can be sponsored by commercial banks and NBFCs in which domestic or foreign institutional investors can invest through units and bonds. While these funds now appear tiny, in the context of banks’ lending exposure to the infrastructure sector — about ₹8.8 lakh crore — they can make a huge difference in pooling private funds over the next three to four years.

While these initiatives to tap into pools of private capital are starting to bear fruit, policymakers will have to ensure a smooth flow of private financing into the sector. For one, the scope of eligible projects under the IDF-NBFC umbrella can be expanded. Currently, these funds are allowed to invest only in projects created through the public-private partnership (PPP) route and have successfully completed one year of commercial production. There is also urgent need for a more vibrant corporate bond market. This will open the floodgates of capital and help improve liquidity and participation in infra bonds issued by banks. The more such bonds are accepted, the more banks will benefit; this will eventually lead to lower cost of borrowing for ailing infrastructure companies.

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