In order to boost infrastructure financing, the central government is planning to set up a Rs 500-crore credit enhancement fund by next month, said a senior government official.
The 2016-17 Budget had first proposed setting up of the fund.
Kumar V Pratap, Joint Secretary - Infrastructure Policy and Finance in the Finance Ministry, said there is a "mismatch" at present, where bonds floated by infrastructure finance firms are typically rated BBB. On the other hand, regulatory agencies mandate a rating of at least 'AA' for investments by the long-term pension and insurance funds.
"More than 70 percent projects worldwide being implemented on SPV (special purpose vehicle) basis have a credit rating of BBB. The regulatory threshold for pension and insurance funds in India provides that you cannot invest below AA. So, in order to remove this mismatch, India is launching a dedicated fund may be next month,” he said while speaking at an event on ‘Private sector participation and innovation in resource mobilisation’ organised by industry body FICCI and AIIB.
The dedicated fund will operate as a non-banking financial company (NBFC) with 49 percent government stake. It has got support from investors such as India Infrastructure Finance Company Ltd (IIFCL), Life Insurance Corporation (LIC) of India.
"China-based Asian Infrastructure Investment Bank (AIIB) will also infuse equity to pick up 10 percent...," Pratap said.
Finance Minister Arun Jaitley had in his 2016-17 Budget speech announced that the Rs 500-crore credit enhancement fund to be set up to help raise credit rating of bonds floated by infrastructure companies.
He added that the fund is fully subscribed and as the lead sponsor, IIFCL will hold 22.5 percent in the NBFC while the rest of the investors' shareholding is yet not known.
Financial institutions and public sector banks as shareholders will give credit enhancement to operational and stabilised projects, brownfield infrastructure projects.
Other investors are state-owned lenders such as State Bank of India and Bank of Baroda and other investors like pension and insurance funds.
According to Pratap, bank lending to the infrastructure segment has slowed down in the past few years and the annual growth rates plummeted to 3 percent between FY14 and FY17, against 43 percent from FY2000 to FY2013.
The non-performing assets (NPAs) from the segment have also ballooned to 9 per cent in FY17, from 3 percent in FY13, he said.
At present, only $110 billion is being invested in infrastructure as against a requirement of $200 billion, leading many analysts to classify India as an infrastructure deficit country.