The new capital adequacy requirements set under Basel III and the deterioration in asset quality of banks (mostly in infrastructure) has required the government to encourage credit institutions to play a bigger role that can help fill some of the financing gaps as well as provide long-term institutional funds to the infrastructure sector. In this regard, non-banking finance companies (NBFCs) play a crucial role in smoothing the flow of funds to the sector. Recently, the Reserve Bank of India (RBI) eased external commercial borrowing (ECB) norms for NBFCs to facilitate their access to foreign capital for infrastructure projects.
Size and growth
NBFCs – both public and private – together disbursed Rs 1,490.28 billion during 2015-16, an increase of 1.02 per cent over the previous year. Disbursements grew at a compound annual growth rate of 4.01 per cent during the period from 2011-12 to 2015-16.
Disbursals by the Power Finance Corporation (PFC) amounted to Rs 465.88 billion during 2015-16, an increase of about 4 per cent over the Rs 446.91 billion disbursed in 2014-15; Srei Infrastructure Finance Limited (SIFL) disbursed Rs 145.33 billion, a rise of about 16 per cent from Rs 125.46 billion in 2014-15; the Housing and Urban Development Corporation (Hudco) disbursed Rs 82.5 billion, an increase of about 2 per cent from the Rs 81.01 billion reported in 2014-15; and India Infrastructure Finance Company Limited (IIFCL) disbursed Rs 94.49 billion as against Rs 73.19 billion in 2014-15.
The share of public NBFCs in providing funding for infrastructure projects has been much greater than that of private NBFCs, highlighting the key role played by the public sector in undertaking infrastructure development in the country. IIFCL’s role and importance in the infrastructure financing space has been increasing over the past few years. To enable the company to play an even greater role going forward, there is a need to consolidate its nascent credit enhancement scheme to attract funding from insurance and pension funds as well as from domestic and overseas investors. So far, only two companies, ReNew Power and Hindustan Powerprojects, have refinanced existing bank loans with fresh bond issues worth a total of Rs 8.31 billion under IIFCL’s credit enhancement scheme.
Recent policy changes
Recently, the government allowed NBFCs to raise ECBs under Track I of the revised ECB framework for financing infrastructure only. The relaxation of ECB norms has made the provision of short-term loans to the sector easier. The relaxed provisions, however, come with a caveat that such borrowings must be fully hedged, which could make it expensive for companies to raise funds overseas.
Further, RBI has allowed NBFCs to provide takeout financing to infrastructure projects, an option that was so far available only to banks. For project loans of up to Rs 10 billion, NBFCs can take over a minimum of 25 per cent of the existing loan through partial takeout financing. For larger loans, NBFCs will have to take over at least 50 per cent from the current lenders. Through this, RBI has allowed NBFCs to re-finance existing infrastructure and other project loans by way of takeout financing, without it being termed as restructuring. The move is expected to provide NBFCs with the opportunity to increase their presence on the back of the ongoing stress in commercial banks and to ease financing for projects.
Current financing appetite
Financial institutions such as the Infrastructure Development Finance Company (IDFC), L&T Infrastructure Finance Company Limited, Infrastructure Leasing & Financial Services (IL&FS) and SIFL have also launched infrastructure debt funds (IDFs) in recent years, where some have taken the mutual fund route while others have opted for the NBFC route. For example, the IDFC IDF and the L&T IDF have successfully raised non-convertible debentures for funding road projects, while the IL&FS IDF has recently announced a third set of schemes to invest in higher-rated infrastructure debt securities. Last year, RBI had allowed IDF NBFCs to undertake investments in public-private partnership (PPP) projects and non-PPP projects without a project authority, provided these projects had completed at least one year of commercial operations. The change in regulatory guidelines has allowed a wider gamut of projects to tap into IDFs.
At present, there is a lack of depth in the bond market, banks are reaching their sectoral limits and there is a general slowdown in private investment. In this context, the revised ECB framework is likely to encourage NBFCs to provide short- to medium-term lending to the infrastructure sector.
In the power sector, developments such as falling gas prices, the renegotiation of liquefied natural gas contracts, some resolution of coal linkage issues, and the government’s commitment to restart stalled projects bode well for entities such as PFC and the Rural Electrification Corporation (REC) that provide finance to power projects.
The role of NBFCs though is not strictly confined to lending. These financing institutions also provide structured solutions and advisory services which can aid projects in achieving financial closure. For instance, IIFCL has been appointed investment adviser to National Investment and Infrastructure Fund [NIIF] Limited, the investment manager for NIIF.
Besides, NBFCs are also diversifying into new areas such as financing renewable energy projects for insulating themselves from investments in debt-laden conventional sectors alone (such as roads and power). The lack of new private projects in conventional power segments such as coal and gas has also prompted NBFCs to shift their focus to the clean energy space. In this regard, REC and PFC are considering offering low-interest finance of over Rs 1 trillion to low-risk renewable energy firms with commissioned projects to help them replace costlier loans.
The bond market has been witnessing increasing issuances by NBFCs. This reflects the increasing role of the latter in funding infrastructure projects vis-à-vis traditional sources such as banks. Tax-free bonds were introduced in 2011-12 and an overall limit of Rs 300 billion was set for seven public sector NBFCs – IIFCL, Hudco, REC, PFC, the Indian Renewable Energy Development Agency (IREDA), the National Highways Authority of India and NTPC Limited – to boost infrastructure spending. In 2013-14, the limit was raised to Rs 500 billion against which companies borrowed Rs 492 billion. Investment appetite remained low in 2014-15 owing to the general slowdown in the economy. Bond issuance activity heightened in 2015-16, with issues by PFC and NTPC being oversubscribed.
Conclusion
As providers of infrastructure finance, NBFCs and banks play a complementary role. The problem of asset-liability mismatch faced by banks can be at least partially addressed by NBFCs providing takeout financing to infrastructure companies. Going forward, a mix of sector-focused institutions (such as the Indian Railway Finance Corporation, PFC and REC) as well as non-sector-specific institutions (such as IIFCL, IL&FS and SIFL) will play a meaningful role in providing both medium- and long-term capital to infrastructure projects.