Credit enhancement fund to guarantee bonds in mkt: IIFCL

The Deepak Parekh Committee on infrastructure financing has reinvented India Infrastructure Finance Company Limited (IIFCL), the only government body which does takeout financing, referring to a process whereby loans are taken out from banks and put in IIFCL's books. This results in some interest rate advantage for the company that is taking such a loan.

The committee has now recommended IIFCL as a guarantor for projects as well as a provider of loans for a period of over 20 years. SK Goel, CMD of IIFCL said the company is starting the credit enhancement facility whereby it is starting the first project which will guarantee bonds in market. However, he feels the product being a new one will take some time to settle in the market. Therefore, it would be essential to wait for approximately two years and then review the products.
According to Goel, 30 to 40% of the infrastructure development funding comes from bond markets in developed countries. But, these funds are being introduced in India for the first time and India will have to follow suit for a similar practice, he explained. He also recognizes the need for a National Investment Board and feels the government's decision to constitute one is an important move. Here is the edited transcript of the interview on CNBC-TV18. Q: Can you take us through the Parekh panel recommendations at this point in time and what would be the sort of change in terms of role that is recommended for IIFCL at this point?
A: Deepak Parekh Committee which is known as a high level committee on infrastructure, has two basic recommendations for IIFCL. One is IIFCL should come into guarantee business and two is takeout finance from IIFCL should come from the infrastructure debt funds.
We have given our reply to the government and the government has to take a final decision. We are starting credit enhancement which will be the first project to guarantee bonds in the country.
Our point is it will take some time to establish this product. We cannot move in a hurry, we have to wait for some time, at least for two years before the product is fully settled. Similarly, for takeout finance, our contention is infrastructure debt funds have yet to come to the market. Till these ideas come, we should better continue with what the mandate is.
After two years a review can be made and we do appreciate the recommendations but, timing is the main factor. In our opinion, two years wait is required before we implement these recommendations. Q: Just the question on the Deepak Parekh committee itself, where do you see the biggest problem, is it that you do not see a market for 20-years paper, what is the biggest problem with the suggestion?
A: We are very much approaching the market and in fact, IIFCL is the first institution which has tried the bonds for 25-30 years quite successfully. But, the market is still very limited because so far the papers are for 10-years but we have to create a demand for 20-year or 25-year papers. I think over a period of time, ultimately infrastructure will require 20-25-year or even 30-year papers. Q: Won't the term insurance companies buy a 20-year or 15-year bond from you?
A: Yes, the first trial by IIFCL was successful and the main contribution came from some insurance companies and some of the provident funds. There was also contribution from some private sector banks also.
_PAGEBREAK_ Q: What is their problem, they do not want to pay you a higher interest rate, they feel they can anyway lend themselves rather than buy your paper? What is the main objection, why are insurance companies not buying a 10-year or a 15-year paper? Is interest rate the problem?
A: The problems as I can visualize is the fear in the mind of the investor to tie-up funds for a very long period. What they want is a rollover of 10-years which can be repeated in another 10-years. That has been the trend so far. Now we are initiating a long-term paper and I am sure once they see stable income, they will definitely get attracted to the long-term paper. But as I mentioned, it will take some time before the perception about these papers change. Q: One issue which I wanted to touch upon was basically the infrastructure requirement in terms of funding is around USD 1 trillion, could you give us a sense in terms of the amount of issuances that you are planning in the next couple of weeks. We do understand that the credit enhancement scheme kicks off in the later half of this month, give us a sense in terms of the amount which you are looking to raise and what would be the idea?
A: We are going to launch the first credit enhancement product on October 31 this month and with that we will be starting the bond market in the country because the USD 1 trillion target that the government has kept can only be filled up by introduction of a strong market in the country. If you look at all advanced countries who are in infrastructure, 30-40 percent funding has been coming only through the bond market and India is no exception, India will have to go for it.
Second thing is providing long-term funds at a very reasonable cost. I can mention here that we have a subsidiary in London giving the foreign currency loan and in a recent meeting on September 28, in terms of the directions of the honourable finance minister; we have taken some decisions which are really revolutionary. The interest rate is reduced from Libor plus 400 basis points to Libor plus 200 basis points and projects in India are going to be benefited by this.
Then the takeout finance scheme which we have launched in India, we want to extend it to UK also subject to the approval of the government and RBI. These are certain initiatives taken by IIFCL to match and complete the target of USD 1 trillion that our government has kept for the 12th five year plan. Q: How much have you financed to take out financing?
A: We have already done business of Rs 5,800 crore in take out financing since January 2012 and it is a very well established product. It is going to benefit banks, project developers and now ofcourse fulfilling one of the very important mandate of IIFCL to provide long-term loans at a very reasonable cost. We are very transparent in that.
_PAGEBREAK_ Q: Who were the banks who benefited from this Rs 5,000 crore that you have taken out already?
A: I can say almost every bank and even private sector banks are there. Q: What is the problem with IDF, it was announced three years ago, ICSI announced it, IIFCL announced it, nobody’s project has taken off the ground, what is the problem with infrastructure debt fund (IDF)?
A: The problem is because it is the first time IDF is coming to India. One party regulator is RBI through the NBFC route, the other regulator is SEBI through the MF route. IIFCL has applied through the MF route and regulators are taking some time because of the first experience. A lot of information is required and teams have visited, asset management companies have been established, a board of trustee has been established and we are expecting a final approval from the SEBI very soon. I think because it’s the first time and it is a new experience for the regulators also, it is taking some time. But, I expect it to come very soon. Q: I had one question with regards to this proposal by the government to start a national investment board (NIB) to hurry up the regulatory approvals with regards to infrastructure financing or infrastructure projects at this point in time. Considering that you are such a close participant with regards to infrastructure, what do you think is the likelihood of the national investment board coming through?
A: National investment board is one of the very important announcements by the government. The need was felt for quite a long time because we are finding infrastructure project getting delayed a number of times due various approvals from the ministries. The National Investment Board, as the honourable Prime Minister has announced, will have full authority to give clearances at one point.
It will be following the China model of single window clearances. That is the main difference and in China infrastructure projects are finishing much before the scheduled time. In India, they are generally getting delayed because of clearances. At times, one road requires clearances from defense ministry, railway ministry, road ministry and rehabilitation ministry as well. That has to stop and National Investment Board will do a very good job in this direction.