Financing infrastructure projects has always been difficult in India. In the past few years, the already difficult situation has been exacerbated, as banks, the largest financiers of the sector, have been affected by high levels of stress in their balance sheets. New forms of funding, though much talked about for a while, are progressing slowly. This has left a number of projects stranded due to a want of funds.
The growth in bank credit, the mainstay of infrastructure funding, has decelerated in recent months. Considering the period from 2011-12 to 2014-15, the average annual growth rate in bank lending which was about 15 per cent at the beginning of the period declined sharply to 4.35 per cent in 2015-16. As of September 2016, the exposure of banks to the sector stood at Rs 9,040 billion. Factors such as a high number of promoters going in for debt restructuring, a lack of well-structured projects, the huge backlog of stalled projects and the adoption of Basel III norms has resulted in muted credit flow from commercial banks to infrastructure projects.
The constrained flow of bank loans has placed increasing importance on funds from non-banking finance companies (NBFCs). NBFCs, both public and private, disbursed Rs 1,490.28 billion during 2015-16, an increase of only about 1 per cent over the preceding year. However, these institutions are expected to increase their contribution following the announcement of a number of enabling policy measures. These include relaxed norms for accessing funds through external commercial borrowings (ECBs), exercising the option of takeout financing, etc.
Fund-raising through the capital market, however, remained muted. The initial public offering space, which revived in calendar year 2015 (issues worth about Rs 65 billion by infrastructure companies), has been sluggish in the past 10-12 months. The market for qualified institutional placements, an alternative mode of raising funds for listed firms, also saw a slump during the same period.
Credit lines from multilateral agencies are an important source of infrastructure finance. From 2011-12 to 2015-16, institutions such as the World Bank, the Asian Development Bank, the Japan International Cooperation Agency and the International Finance Corporation together extended over $33 billion for infrastructure projects in the country, with a mixed year-on-year trend. However, 2015-16 witnessed an increase in financial assistance of 7.35 per cent over 2014-15. In 2016-17 (till November), a total of $3.6 billion was extended by these institutions.
With regard to funds tapped through ECBs, between 2011-12 and 2016-17 (till September 2016), over $80 billion was raised by infrastructure companies. During 2015-16, ECBs amounting to $17.16 billion were garnered, an increase of only about 4 per cent compared to $16.44 billion in the preceding fiscal year. In 2016-17 (till October 2016), about $5 billion was acquired through this route.
Private equity (PE) investments have also been an important source of funds. During 2015-16, 27 deals worth Rs 262 billion were witnessed, a significant improvement in value terms from the 26 deals worth over Rs 107 billion during 2014-15. In 2016-17 (till November 2016), 14 deals worth over Rs 141 billion were finalised. Factors such as improved investor sentiment, strong macroeconomic fundamentals, and the availability of operational stressed assets have aided PE activity.
New sources of funds, though slow in gaining traction, bode well for the future. Newly established international institutions such as the Asian Infrastructure Investment Bank and the New Development Bank hold significant promise. Besides, progress on setting up of the National Infrastructure Investment Fund is also encouraging. There is interest in the fund from international sovereign and pension funds, which is expected to positively influence investor perception towards investing in the country’s infrastructure space. Meanwhile, innovative finance products such as infrastructure investment trusts are also being set up. While the instrument received lukewarm response after its launch, several regulatory changes in its framework are expected to attract investor interest.
On the flip side, infrastructure debt funds have had limited success so far. A lack of interest in these instruments within the domestic space has also staved off interest from foreign investors. Pension, insurance and soverign wealth funds, the most suitable instruments for infrastructure financing given their long-term nature, are likely to increase their participation, given the availability of better-rated securities and credit-enhanced products.
Net, net, it must be acknowledged that a poorly structured project will not find funds, even in mature, developed financing markets. Thus, it is important that projects are well designed and have favourable economics. The risk and return matrix also needs to be fair and well designed. This will not only enhance investor interest but will also be a huge factor in determining the pace of infrastructure development and, in turn, economic growth in the country.