Infrastructure financing has been a vexed issue in India. Traditionally, banks have been the biggest source of funds for infrastructure projects. However, lately, factors such as the exhaustion of sectoral limits, the adoption of Basel III norms, and the high level of stressed assets have impacted banks’ appetite for infrastructure projects. Against this backdrop, the development of new sources of financing has become imperative.
In the past one-two years, some noteworthy initiatives have been taken by the government to introduce new sources of funds, as well as to debottleneck the banking sector, the major infrastructure financier.
Indian Infrastructure tracks the progress of these initiatives…
The establishment of the National Infrastructure Investment Fund (NIIF), India’s maiden sovereign wealth fund, was proposed in Union Budget 2015-16 for funding commercially viable greenfield, brownfield and stalled infrastructure projects. The proposed corpus of the fund is Rs 400 billion. It is to be set up as a trust and will raise debt to invest in the equity of infrastructure finance companies (IFCs). The idea is that these IFCs can, in turn, leverage this extra equity manyfold. In that sense, the NIIF will act as a banker for bankers (IFCs) of infrastructure projects. The NIIF is registered with the Securities and Exchange Board of India (SEBI) as a Category II Alternative Investment Fund (AIF). The advantage of AIFs is that they can fund infrastructure projects both in the preconstruction as well as the post-construction phase.
While the proposed financing vehicle is a welcome step, time delays in its execution have been apparent. There has not been much movement on the ground on account of a paucity of projects that require funding; most of the projects are still on the drawing board. However, some progress has been made in recent months. In June 2016, the Ministry of Finance appointed the chief executive officer of the NIIF. Besides, an initial budgetary allocation of Rs 40 billion for the fund has been made in the 2016-17 budget.
The NIIF also garnered interest from foreign investors. It has entered into discussions with various prospective investors including sovereign wealth funds as anchor partners. MoUs have been signed with the Qatar Investment Authority (Qatar), RUSNANO OJSC (Russia) and the Abu Dhabi Investment Authority (UAE). In the power sector, two funds under the NIIF are being planned – a renewable energy fund and a stressed power asset fund. The renewable energy fund is likely to garner $2 billion. Moreover, the Life Insurance Corporation of India has agreed to partner NIIF. It will contribute 10 per cent (Rs 40 billion) of the investment corpus and become an equity partner in the company that will run the fund.
Meanwhile, the first batch of eight projects to be given assistance from the fund has been identified. These infrastructure projects include a Konkan Railway project, a power transmission project and some road projects.
New international financing institutions
The New Development Bank (NDB), an international financing institution, has been established by Brazil, Russia, India, China and South Africa, with a mandate to extend financing for the execution of infrastructure projects as well as to support sustainable development in emerging economies. The capital contribution from the member nations is to the tune of $1.5 billion.
The bank’s creation was first mooted in March 2012 and it disbursed its first loan to India in April 2016. The bank extended credit of $250 million to Canara Bank for the purpose of on-lending to projects for setting up 500 MW of renewable generation capacity in the country. In November 2016, the NDB announced the approval of funds to the tune of $350 million for the Major District Roads [MDRs] Project in Madhya Pradesh. The project involves the upgradation of approximately 1,500 km of MDRs in the state with a focus on the creation of all-weather roads, and improved road maintenance and asset management. Recently, in November 2016, the bank disclosed its plans to extend loans worth $2.5 billion in calendar year 2017.
The China-sponsored Asian Infrastructure Investment Bank (AIIB) was established in October 2014 to address the $8 trillion infrastructure spending deficit that exists in Asia alone. The AIIB officially opened on January 16, 2016, with an initial capital of $100 billion. The bank comprises 57 founding members, of which India is the second largest shareholder with an 8.52 per cent stake.
In June 2016, the bank commenced its lending activity and approved loans totalling $509 million for a number of countries such as Pakistan, Bangladesh, Indonesia and Tajikistan. Thus far, however, the bank is yet to announce support to a project in India. Currently, it has two projects under consideration – a transmission system strengthening project in Tamil Nadu and a 24×7 power supply project in Andhra Pradesh (co-financed with the World Bank).
While India needs to develop new funding sources to support infrastructure creation, equally important is the need to weed out problems impacting the financing appetite of banks, the major financiers of infrastructure projects. The gross non-performing assets (NPAs) of banks increased sharply, from 5.1 per cent in September 2015 to 7.6 per cent in March 2016. About one-fifth of these stressed loans are on account of the infrastructure sector, particularly the power, road, steel and shipping sectors. Taking cognisance of this, the Reserve Bank of India (RBI) has taken a number of measures. The introduction of the Scheme for Sustainable Structuring of Stressed Assets (S4A) is the latest step by the apex bank.
Under the scheme, banks can divide the existing debt of a company as sustainable (Part A) and unsustainable (Part B), based on its cash flow. Banks are permitted to continue giving loans for the sustainable portion of the debt, while the unsustainable portion can be converted into equity or a convertible security. The scheme, therefore, allows the incumbent management to continue as long as the default is not wilful. As a result, on the one hand, the debt burden of the borrower is substantially reduced and, on the other, the promoter’s equity stake is also reduced. The idea behind the scheme is that banks will get the upside when the company improves its position and it also gives the borrower another chance to revive the company.
In response to stakeholder feedback, RBI tweaked the S4A norms in November 2016. According to the revised guidelines, while Part B of the loan will continue to be non-performing, Part A of the loan may be classified as standard, subject to lenders provisioning upfront for at least 50 per cent of the Part B debt or 25 per cent of the aggregate outstanding debt, whichever is higher. RBI has also
stated that lenders may upgrade Part B to the standard category and reverse the associated enhanced provisions after one year of satisfactory performance of Part A loans. These are slightly easier regulations because banks have now been given 180 days to figure out a resolution plan for the conversion of Part B loans into equity/convertible security. So far, construction major Hindustan Construction Company’s Rs 50 billion debt recast has been the first case to receive approval from the RBI-mandated overseeing committee to implement the S4A in December 2016. The company’s board approved issuance of equity shares as well as optionally convertible debentures worth about Rs 20 billion to the lenders.
Meanwhile, a significant change that has been made in the S4A is that the new promoter should have acquired at least 26 per cent (earlier 51 per cent) of the paid-up equity capital of the borrower company and should be the single largest shareholder of the company.
Continuing its policy reform, the central bank also amended the 5/25 refinancing scheme. It has now allowed lenders to extend the 5/25 scheme to new project loans. The scheme can also be extended to existing project loans with an aggregate exposure of Rs 2.5 billion to banks, as compared to the earlier mandate of Rs 5 billion.
The way forward
For a growing economy like India, constrained infrastructure financing has the potential of slowing down growth in the gross domestic product. The importance of fund flow into the sector thus cannot be overemphasised. The infrastructure financing space in its current state warrants even greater attention, given the declining financing capacity of banks, the traditional financiers. New sources such as the NIIF and international institutions such as the AIIB and the NDB are a welcome addition. Meanwhile, interests, especially of foreign investors, must be safeguarded for vehicles such as the NIIF to enable their smooth take-off.
(Based on inputs from a presentation by Deepak Chatterjee, CEO, IIFCL Projects Limited)