Interview with P.R. Jaishankar: “We need to move on to the next generation of long-term financing”

“We need to move on to the next generation of long-term financing”

P.R. JaishankarCommercial bank funding has increased the pace of infrastructure development in India in recent years. At a recent India Infrastructure Forum event, P.R. Jaishankar, Managing Director, India Infrastructure Finance Company Limited (IIFCL), shared his views on the current financing scenario in the infrastructure space. Excerpts…

Apart from budgetary allocations, commercial banks have been the major financiers of infrastructure projects ever since their inception. Despite their asset liability mismatch issues, commercial banks took up the responsibility of funding infrastructure. Today, the majority of infrastructure developments can be attributed to commercial bank funding. In order to facilitate long-term financing of infrastructure projects, options such as asset refinancing and some of the upcoming new-age financial instruments need to be looked at. Commercial banks, and a few select financial institutions such as IIFCL, are probably the only institutions in India today that have the required wherewithal to fund greenfield projects. Thus, commercial banks continue to play a significant role in the funding of new infrastructure projects in the country.

Going forward, the country’s financial architecture is expected to be different. Greenfield risk should be initially borne by commercial banks, but once the project is completed, the risk should be transferred to other commercial banks, infrastructure investment trusts, the bond market or other financial institutions. The net benefit from this will come in the form of a longer amortisation period for the projects, making them more viable. This would also result in some significant, fundamental changes, lowering both the risk and the user fees.

Fall in share of commercial bank lending

While commercial banks have been one of the major funders of infrastructure projects since the beginning, the market is now valued at approximately Rs 25 trillion, which includes both banks and other Non-Banking Financial Companies-Infrastructure Finance Companies. As far as the proportion of commercial bank lending to the infrastructure sector is concerned, commercial banks’ credit offtake has been decelerating for a while. Their share in the market was approximately 60-65 per cent a few years ago, but it has now shrunk to around 45 per cent, while that of non-banking financial companies has climbed to 55 per cent. The drop in the share of commercial banks can be attributed to a variety of factors, including a slowdown in greenfield offtakers. The infrastructure sector has not witnessed major growth, with no major projects being undertaken in recent years. The Covid-19 pandemic has also contributed to a reduction in the infrastructure credit growth rate. However, some commercial banks, including the State Bank of India, the Union Bank of India and Canara Bank, have been very active in terms of lending.

Key priority areas

IIFCL will continue to focus on infrastructure projects and take greenfield risks. It will also concentrate on the inorganic way of growth, developmental sectors such as the railway industry, and greenfield projects. Going forward, IIFCL will be strengthening its internal capacities and mechanisms. We are working on putting in place a real-time online project monitoring system, which is now in the pilot stage. We are considering revamping the risk management framework and implementing a more integrated risk management mechanism. We are also looking at a treasury management system to help improve liability management.

IIFCL has been largely concentrating on the road and power sectors, with each sector accounting for approximately 45 per cent share in the company’s portfolio. This concentration has now changed to 35 per cent for roads and around 29 per cent for the power sector. The remaining sectors, such as airports, ports, urban infrastructure and city gas distribution, are some of the new areas that the company has entered into. IIFCL also has a strong focus on the healthcare sector.

We have done a lot of financing for various state government projects in water supply and urban sanitisation.

The way forward

Infrastructure is a generational investment and, therefore, we need to move on to the next generation of long-term financing. Asset restructuring is a type of relay refinancing mechanism that must be promoted as a sustainable long-term infrastructure financing solution, with instituions such as IIFCL, is capable of financing projects with a maturity of more than 20 years. We require a new financial architecture, which can only be achieved through a set of conducive regulations.