Infrastructure lending comes of age in India

A few more tweaks and Indian infrastructure could well lead to global stakeholder wealth.

Has India finally got its infrastructure lending piece right? We are now counting the kilometres of completed roads and the quality of water supply. Look at the large number of banks that had lent to the various segments of the housing industry and got stuck with projects neither complete nor capable of returning the borrowed money. The infrastructure sector was no better with cost and time overruns becoming the norm.

So, what has changed now? Firstly, budgetary allocation of Rs 10 lakh crore funds for capital investment in infrastructure was unheard of before. Backed by a realisation that special policies need to be drafted for long-term finance. The National Bank for Financing Infrastructure & Development (NBFID) created by an act of Parliament as a development finance institution can take the loans off the balance sheets of banks, where asset-liability mismatches prevail.  How can an entity with five-year receipts lend for over 12-15 years? But with the new structure, it can lend to the project for five to eight years, transfer the debt to the development finance institution and continue with its short-term lending pattern. NIIF Infrastructure Fund Ltd (NIIF IFL) was incorporated as an infrastructure debt fund to finance operating infrastructure projects. These new-age lenders today seem to know how to offer the carrot and wield the stick to protect the funds they give out.

Alternative Lending Formats

Firstly, the system is graduating from doles to conscious lending for the tenure of the project. Instead of brushing under the carpet the mismatch of tenure of funds raised to the term of lending, they have started facing it and finding alternative forms of lending. The risks of a new project from start to steady operational execution have been acknowledged. NIIF IFL, for instance, can only pick up a project that has operational stability.

The Reserve Bank of India comes out with an annual list of what all classifies as infrastructure. Lenders have to adhere to it scrupulously. According to the RBI, ‘Infrastructure loan’ means a credit facility extended by non-banking financial corporations (NBFCs) to a borrower for exposure in the following infrastructure sub-sectors: transport, energy, water and sanitation, communication and social and commercial infrastructure. So NBFCs have a framework within which they can work.

With the volume of infrastructure already planned, the National Infrastructure Fund was announced in the 2015-16 Budget and is already operational at Rs 21,000 crore. Specialist agencies such as the Power Finance Corporation and REC Ltd have the mandate to lend to power projects, both traditional and green, and also some infrastructure lending now. Managing directors are now seen speaking about shareholder returns and lower or no non-performing assets (NPAs). The new-age lending institutions have former private sector heads leading them, and the corporate culture has started prevailing here.

Regular Monitoring

It was a pleasure to hear lenders such as REC and NIIF speaking about their low or zero NPA status. A similar pride is shown by the Rs 15,530 croreSpecial Window for Affordable and Mid-Income Housing (SWAMIH) fund managers, who have a sovereign mandate for priority debt financing for the completion of stuck real estate projects. They function better than the best private sector lenders. They do meticulous checks before lending to stuck real estate projects and keep engaged throughout the lifecycle of the finance. Diligent checks are carried out on the progress of the project on ground, and the management of funds in escrow accounts. Any blips are sorted out before they become pressure points.

Basically, it boils down to well-defined policy and meticulous execution. By making funds available for completion, all finance inputs such as inflows and outflows are managed by the lender teams. With little or no leeway to siphon out funds, projects start making impressive progress. On completion, SWAMIH enforces the last-in-first-out principle and exits with its 12.5 percent management fee and moves on to the next project. It is a textbook case of proper bookkeeping and management producing results.

Today government equity has started flowing in the form of a 49 percent stake in NIIF and a Rs 20,000 crore commitment to the SWAMIH fund. Industry observers such as Naresh B Parasrampuria, CEO, Ether Capital estimate a need for massive investment in the next three to five years. This should ideally draw an estimated 20-25 per cent of the investment from the private sector, he estimates.

Raising funds is the least of the problems today. The primary market is up, the bond market is growing, and international funds are available. The Highway InvIT (Infrastructure Investment Trust) was subscribed seven times over in seven hours, minister Nitin Gadkari announced. What we need is institutional equity capital and an institutional approach. The India approach is in a good place. Domestic and global investors are lining up to put their funds in. With a few more tweaks, Indian infrastructure could well lead to global stakeholder wealth.

E Jayashree Kurup is a writer-researcher in real estate and Director Real Estate & Cities, Wordmeister Editorial Services. Views are personal, and do not represent the stand of this publication.