Infrastructure financing in India faces many obstacles, ranging from the excessive cost of raising capital to the lack of long-term funding. Financing infrastructure projects is challenging, mainly due to the insufficiency of capital and liquidity in banks and non-banking financial companies (NBFCs), as well as sectoral constraints. The government’s ambitious target of Rs 111 trillion in investments under the National Infrastructure Pipeline (NIP) by 2024-25 is likely to face severe headwinds due to the pandemic. In order to provide funding to almost 7,000 infrastructure projects under the NIP, the government has tabled the National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021 in the Lok Sabha with the aim of setting up a government-owned development finance institution (DFI). The DFI will be established with a capital base of Rs 200 billion and immediate funding of Rs 50 billion from the government. The government aims to leverage these invested funds and raise up to Rs 3 trillion in the years ahead. The proposed DFI will expand long-term non-recourse infrastructure funding in the country, including the advancement of the debt as well as credit and currency derivatives markets, thereby catalysing infrastructure financing in the country.
Indian Infrastructure takes a look at the key infrastructure financing trends in the country…
Banks and NBFCs credit growth
Following significant loan disbursements by banking institutions in sectors such as construction, power, roads, railways, ports, waterways and telecommunications in 2018-19, the trend of credit growth towards the infrastructure sector could not be continued. Bank lending growth, which had already slowed down in 2019-20, took another hit in 2020-21 in the aftermath of the Covid-19 pandemic. The banking industry’s unwillingness to offer loans to large-scale enterprises having considerable amounts of stressed assets on their balance sheets, coupled with the uncertainties that emerged as a result of the pandemic, caused the slowdown. The public sector banks, which account for 76 per cent of the entire infrastructure lending, have principally fuelled the fall in the overall lending growth.
Despite being fairly resilient, private sector banks have witnessed severe stagnation in credit growth in the infrastructure segment. In November 2020, the infrastructure sector accounted for 36.6 per cent of overall industrial lending. Within the infrastructure space, the power industry obtained the highest infrastructure credit, accounting for 55 per cent, followed by roads and ports with 20 per cent and telecommunications with 10 per cent. However, recent statistics indicate that only the road and port sectors are experiencing positive credit growth, and it is declining even for the telecommunications and power sectors.
In the NBFCs infrastructure financing space, public sector NBFC infrastructure financing continues to account for the majority share of 94 per cent, with a total lending book of Rs 11.6 trillion as of December 31, 2020. However, the NBFC sector experienced a slowdown in infrastructure lending in March 2020. The lockdown compounded this, with credit growth further decelerating in November 2020. The Reserve Bank of India (RBI) has adopted a number of initiatives to tackle the liquidity crisis of the NBFCs, including the introduction of targeted long-term repo operations (TLTROs) in its monetary policy statement, aiming to provide liquidity assistance to NBFCs – particularly the smaller ones – and microfinance institutions. The RBI’s inclusion of NBFCs in the TLTRO scheme is expected to promote NBFC lending to diverse sectors of the economy.
Private equity and venture capital investments
In the pre-Covid era, private equity (PE) investments had picked up substantially, especially in sectors such as roads, power and telecom. During the first wave of the pandemic, investors held a positive outlook for the infrastructure sector, but the second wave changed their outlook to somewhat cautious. In 2020, the PE and venture capital (VC) sectors recorded investments worth $47.6 billion, almost maintaining the previous year’s figures. The overall PE and VC deals were primarily driven by significant PE investments of $17.3 billion in the Reliance Group entities, which accounted for 36 per cent of the aggregate PE and VC investments in 2020. One of the key causes for the relative drop in overall PE and VC investments in 2020 was the underperformance of the infrastructure and real estate sectors in attracting these investments. PE and VC investments in the infrastructure sector were hit the worst in 2020.
The infrastructure sector, which received the highest investment of $13.8 billion in 2019, attracted merely $5 billion across 30 deals in 2020, signifying a 64 per cent year-over-year drop. Almost all sectors experienced a significant drop in value invested in 2020. Telecom was one of the exceptional sectors, seeing an increase in capital inflow during the year. It received its highest-ever funding of $10 billion across 13 transactions, marking a tenfold increase on a year-over-year basis mainly due to the investments in Jio Platforms. This was followed by the financial services sector, which received an investment worth $4.8 billion across 144 deals, registering a substantial dip of 47 per cent on a year-on-year basis.
The government has traditionally been the country’s principal backer of infrastructure projects. Of late, there has been a significant shift in the general perspective, and the current belief is that this may not be the optimal strategy for financing large-scale projects. As a result, corporate bond issuances have picked up in the past few years. In 2020, bond issuance in India’s corporate bond market reached a new high, mainly attributable to the RBI’s liquidity infusions and frequent rate cuts, which lowered borrowing costs to unprecedented levels. In 2021, the pace of corporate bond offerings has decelerated owing to liquidity constraints as well as higher fundraising costs being faced by the corporations. Some of the notable bond issuances are ICICI Bank Limited’s Rs 30.01 billion infrastructure bond offering, the India Grid Trust’s public offering of redeemable non-convertible debentures for an amount up to Rs 1 billion, and Bharti Airtel Limited’s $1.25 billion bond offering spread across senior and perpetual issuances.
Sustainable bonds continue to attract a lot of interest from public and private sector corporations, especially for renewable energy projects. The trend for sustainable bond issuances in India is evidently upward. In the initial months of 2021, the corporations raised the highest ever sum of money, more than double of what they had raised in the entirety of 2020. From January 2021 till the second week of May 2021, Indian corporations managed to raise $4.96 billion through the issuance of sustainable bonds. These issuances include seven green bonds issues, one social bond issue, and one sustainability-linked bond issue. The corporations that issued sustainable bonds were Continuum Green Energy Private Limited, the Greenko Group, ReNew Power Private Limited and Shriram Transport Finance Company Limited.
Key trends of alternative sources of capital
Under the Asset Monetisation Programme, the central government plans to monetise some of its mega infrastructure projects across sectors in order to generate capital for new investment opportunities. As part of this programme, it will attempt to collect Rs 850 billion from the monetisation of highways alone by 2024-25. The government had set a target of monetising
Rs 102.5 billion worth of highways in 2020-21, but it fell short of its target and, therefore, it now plans to monetise Rs 100 billion worth of highways in 2021-22. The Ministry of Road Transport and Highways offered 566 km of road assets, worth Rs 5 billion, via the toll-operate-transfer (TOT) mechanism until January 2021 for the fiscal year 2020-21. In June 2020, the National Highways Authority of India (NHAI) came up with a decision to offer smaller bundles of road assets worth Rs 5 billion and above as well through the TOT model. Given the gloomy impact of the second wave of Covid-19, the authorities are waiting for the traffic to normalise before offering the next bundle of road assets through the TOT model.
With six infrastructure investment trusts (InvITs) already up and running and many more in the offing, the instrument is gradually finding its feet. According to ICRA, fundraising through InvITs is estimated to go up to Rs 2 trillion in the next five years. With respect to the changes made in the past few years in regulations, the Securities and Exchange Board of India has taken various steps to ease fundraising and provide protection for investors’ interest. These steps include increasing the limit of leverage on InvITs from 49 per cent to around 70 per cent of the InvIT assets, provided there is a separate framework for privately placed unlisted InvITs, facilitating fundraising for InvITs that have been provided to preferential issues, institutional placements, rights issues and first rights issues; and removing unit holding restrictions or non-sponsor investors. Moreover, the Insurance Regulatory and Development Authority of India has claimed that insurance companies will be allowed to subscribe to the debt securities of InvITs and real estate investment trusts shortly. Meanwhile, the Pension Fund Regulatory and Development Authority is planning to provide InvITs in debt security.
Multilateral institutions such as the World Bank, the Japan International Cooperation Agency (JICA), the Asian Development Bank and the Asian Infrastructure Investment Bank have consistently been some of India’s most crucial sources of infrastructure financing. The Delhi metro rail project, which is being funded by JICA, is a prominent example of such multilateral funding. During the previous year, these agencies made the majority of their commitments in the power, road, urban rail and renewable sectors.
The infrastructure sector has received a fiscal stimulus and significant attention from the government recently. The government has proposed to develop a Rs 200 billion DFI with the target of financing the enormous NIP project. However, developing a DFI alone will not entirely resolve the infrastructure sector’s distress with regard to financing. It needs to be complemented with alternative sources of infrastructure funding, and banks and dedicated NBFCs will have to take charge for funding big-ticket infrastructure projects. Over the past few years, banks have consistently underperformed in terms of their contribution to total infrastructure lending. The bond market can provide infrastructure corporations with long-term, fixed rate financing. However, the debt market in the country is in its infancy and still has a long way to go. InvITs have received a lot of regulatory attention, and there is increasing investor participation as well. With an evolving regulatory framework and clear policies, it is expected that InvITs will be considered the preferred route of infrastructure investment for long-term investors. Going forward, alternative sources of funding will be required to maximise infrastructure development in the country.