Interview with P.R. Jaishankar

“The future of infrastructure financing lies in the bond market”

The infrastructure sector needs innovative financing instruments besides traditional bank credit. Development financing will play a crucial role in meeting the long-term funding needs of the sector. The migration from direct term lending to relay financing is the need of the hour. In a recent interview with Indian Infrastructure, P. R. Jaishankar threw light on the impact of Covid-19 on infrastructure financing, steps taken by India Infrastructure Finance Company Limited (IIFCL) in response to the pandemic, its future plans and the need for innovative financing. Excerpts…

What has been the impact of Covid-19 on infrastructure financing?

The pandemic has brought unprecedented challenges for the economy. The rate of growth of GDP fell from about 6.1 per cent in 2018-19 to around 4.2 per cent in 2019-20. The Covid-induced lockdown and the resulting disruptions across various infrastructure sectors were the key reasons behind the low growth rate. The pace of project execution also slowed down, resulting in cost overruns. In response to the pandemic, the Reserve Bank of India (RBI) provided a moratorium on term loans, thus alleviating most of the liquidity pressures. Howbeit, financial institutions are now expected to add an additional 10 per cent provisioning requirement, which would increase provisioning costs and in turn impact the profitability of financial institutions. This will be a huge concern.

What has been the impact on lending by financial institutions?

The situation is not daunting as far as liquidity with financial institutions is concerned. However, lending has to take place in a viable atmosphere, which is currently lacking. Project execution has been badly affected due to the pandemic and the subsequent lockdown to stem its spread. Under-construction projects have been delayed due to disruptions caused by the pandemic and labour migration, resulting in time and cost overruns. With respect to completed projects, the negative impact has been on the revenue earnings of project developers. For instance, the National Highways Authority of India had to put a complete 25-day ban on toll collection, resulting in revenue loss. For power projects, which derive about 50 per cent of revenue from distribution companies, the revenue loss has been quite significant due to low offtake.

How has the operational and financial performance of IIFCL been impacted due to Covid-19?

In view of its sufficient liquidity, IIFCL has not stopped its lending and continues its business as usual. The moratorium extended to 88 infrastructure projects has resulted in an increase in IIFCL’s provisioning cost, thereby increasing its credit cost. While interest rates have softened, IIFCL faces a strange dilemma of not having the mandate to raise resources from short-term sources. Hence, the company has not been able to take advantage of the softening interest rates. While the yield has been depleting, IIFCL’s cost has remained the same, resulting in a depleting net interest margin.

What are IIFCL’s expectations with regard to loan disbursements in 2020-21 as compared to the previous fiscal?

While the pipeline will remain weak in the short run, it is expected to improve significantly in the medium to long run. New sectors, including station development in railways, hybrid annuity model-based projects in the road sector, renewable energy and city gas distribution, are expected to have the maximum share in short- to medium-term financing. Further, IIFCL would be focusing on takeout financing, credit enhancement and refinancing along with direct lending as the latter has its own economic life cycle and loan schedules. Proportionately less loan disbursements are expected to take place for under-construction projects, at least during the current fiscal. Accordingly, IIFCL will be focusing on reducing the overall interest burden for projects that have already achieved financial closure and those that are operational.

What are some of the recommendations for regulators to enable IIFCL to contribute more towards infrastructure development?

It is a well recognised fact that a development finance institution is imperative in the Indian context, particularly in the infrastructure domain. The Indian economy needs a market-oriented, new-age development finance institution suited to the country’s current dynamic environment. This is because project size and technological complexities have increased and there is a need to match the loan size commensurately. Thus, a well-built institution to address the needs of the new-age infrastructure is essential.

There is also a need to build development finance institutions in a way that they can stimulate liquidity by way of promoting the secondary market for infrastructure loans. While these could be the long-term goals, there is a need to promote refinancing or relay financing in the short term so as to keep the long-term financing going. In order to ensure the same, conducive regulations need to be put in place. The requirement comes in view of the present practice of treating refinancing or rescheduling akin to restructuring, resulting in the downgradation of the underlying assets and rendering them as non-performing assets. Hence, refinancing must be looked at as a sustainable model of financing for standard assets without any overdues. This, in turn, is expected to promote long-term finance and long-term amortisation for infrastructure projects. The 5:25 scheme might have to be brought back into the financing picture.

How has IIFCL’s journey been so far? What are the kinds of services offered and what are its future plans?

The scope of financing infrastructure projects is huge. IIFCL is in the pursuit of getting to the next level of activities on the economic front. As far as the overall position of IIFCL between the government and the market is concerned, it is trying to expand its scope to include aspects relating to the development and promotion of the infrastructure sector. It is also aiming to take a leadership role in the sector.

Overall, IIFCL’s journey has been enlightening ever since it was incorporated in 2006. As of today, it has emerged as one of the significant lenders for infrastructure projects in the country. It has developed capacities and come up with innovative financial instruments with takeout financing. Of late, it has taken on a mainstream role. Its credit enhancement scheme has also been successful. The company is the only one in its domain to offer subordinate debt for greenfield infrastructure projects. Further, it has been operating the refinancing scheme for providing liquidity to other refinancing lenders.

While the gamut of IIFCL’s financial activities has been in line with the market requirements, the key role played by the company has been that of a policy advocate for the sector. It has been doing so through its project advisory and loan syndication arm, IIFCL Projects Limited. It has also been engaged with the central and state governments for conceptualising and structuring public-private partnership projects, besides other commercially viable infrastructure projects. IIFCL’s another one-of-its-kind subsidiary, IIFC UK, takes care of long-term external commercial borrowings for infrastructure projects. Meanwhile, it has a $5 billion line of credit from RBI for financing the capital expenditure for infrastructure projects.

IIFCL Projects Limited has also been designated as the principal infrastructure consultant to the Tamil Nadu government for supporting the latter in its infrastructure endeavours. It has similar consultancy partnerships with the governments of Kerala and Meghalaya. Going forward, IIFCL aims to expedite the implementation of these initiatives in a manner that it stimulates the overall environment for infrastructure projects.

IIFCL has taken up the role of promotion, development and financing on a more equitable footing. In the long run, IIFCL has pitched itself aptly to play the role of a large development financier for infrastructure projects. Going ahead, IIFCL could also cater to infrastructure projects outside the country, with benefits accruing to the home country.

Which alternative source of financing has fared well?

According to RBI, a mixed bag of financing sources is required to cater to infrastructure projects. Looking at the progress of various financial instruments, IIFCL has graduated from direct term lending to greenfield projects to takeout financing and further to credit-enhanced bonds. Thus, there has been a gradual migration from banking to the bond market. The future of infrastructure financing lies in the bond market. That said, the banking sector will not be left out from financing infrastructure projects. This is because there exists no other institution in the country that can handle greenfield and construction projects as well as the banking sector does, but they need to lend as per their liability profiles. At the same time, there is a need to promote relay financing in order to ensure that infrastructure projects get the requisite long-term financing. The bond market must play a crucial role, at least for completed projects. Going forward, more liquidity in the bond market is required to encourage active participation of investors.

What is the future outlook for the infrastructure financing sector?

The infrastructure sector is the backbone of any economy. Earlier, the road sector was at the forefront of development, followed by other sectors. However, the future belongs to mega projects across different sectors. While such projects are expected to play a huge role in the economic development of the country, innovative and structured financial instruments would be required to make them a reality.

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