Infrastructure is the backbone of any economy and India is no different. Hence, a robust infrastructure is essential for improving the overall economic development. Around a decade back, the infrastructure financing landscape in India was substantially less complex. However, as a result of myriad of innovations and technological interventions, infrastructure financing has become intricate. It now presents multiple dimensions of risk, as various sectors are involved. Due to this, the risk perspectives are now evaluated differently than in the past and as a result, infrastructure financing is a multifaceted and highly complex exercise.
Nevertheless, encouraging developments have also been observed in this space. For instance, there have been notable enhancements in skill sets, and multiple angles on risk perspectives are also being discussed and considered. At the India Infrastructure Forum 2023, P.R. Jaishankar, managing director, India Infrastructure Finance Company Limited (IIFCL), shared his views on the current financing trends, emerging opportunities and future outlook. Excerpts…
IIFCL’s progress
IIFCL has now evolved from a last-mile lender to a preferred financier of infrastructure projects, with an increased focus on providing sanctions to greenfield projects of national significance. Over the course of the past three years, the company has made significant strides. It has seen an improvement in nearly all facets of its business, which has enabled it to holistically serve the infrastructure sector in the country. Moreover, in the future, the company intends to enhance its position as a dedicated lender in the infrastructure sector.
So far, the cumulative sum of the sanctions is approximately Rs 2,130 billion, while the disbursements amount to over Rs 1,050 billion Approximately 35 per cent of the company’s business has been conducted within the past three years.
IIFCL has strategically diversified across sectors with time. The company’s presence has undergone significant expansion to encompass approximately 21 infrastructure subsectors such as data centres, hospitals and metros, originating from the harmonious list of infrastructure subsectors from the Department of Economic Affairs (DEA), Ministry of Finance, Government of India.
In addition, IIFCL offers a diverse array of financial products across the project life cycle, including takeout finance, credit enhancement, direct lending and refinancing schemes.
The company has witnessed a notable reduction in net non-performing assets (NPAs) and gross NPAs to 1.41 per cent and 4.7 per cent, respectively, as of March 2023 from around 10 per cent and 19 per cent about three years back. IIFCL’s recovery from NPA accounts has tripled in the past three years to over Rs 13.5 billion in 2022-23. This has been the result of persistent efforts being made towards recovery in NPA accounts by way of termination payment, arbitration process, a resolution plan and one-time settlement, etc. As a public sector financial institution, it is also essential for IIFCL to prioritise commercial sustainability and viability in order to guarantee profitability and sound governance.
Company initiatives
In 2014, IIFCL initiated the process of credit enhancement in collaboration with the Asian Development Bank (ADB). Shortly after, on a standalone basis, the lender sanctioned around 18 projects. The primary objective of IIFCL has been to facilitate credit enhancement, particularly for issuers and developers with lower credit ratings, with the ultimate objective of enabling developers to channel funds from the debt capital market.
As one of the biggest borrowers, IIFCL has established amicable relationships with various multilateral agencies. About 40 per cent of the firm’s long-term resources are primarily sourced from multilateral agencies. Additionally, the company has committed lines of credit with almost all renowned multilateral institutions.
In 2021-22, the company ventured into project bonds investment and lending to infrastructure investment trusts (InvITs). This has further expanded its loan portfolio and improved the quality of its assets. As of March 2023, IIFCL has invested Rs 62 billion in project bonds, including Rs 6.35 billion in bonds issued for renewable energy, while Rs 68 billion has been sanctioned in InvITs.
IIFCL has been playing an important role in advocating policies for government and regulatory bodies. Furthermore, as a special purpose vehicle (SPV) of the government for financing the infrastructure sector, it is imperative for the company to devise strategies to effectively advance the government’s ambitious National Infrastructure Pipeline and National Monetisation Pipeline initiatives.
The company has also been active on the digital front, with initiatives such as the online project monitoring system (OPMS), which was introduced for the first time by a non-banking financial institution (NBFC) in the history of the infrastructure sector in India. The OPMS is envisaged as an effective tool for ensuring progress-linked disbursement in infrastructure projects with drone-based monitoring.
Recommended reforms
Currently, there is a wide range of alternative routes for financing infrastructure. Even though this is the result of the substantial policy impetus witnessed in the past few years, it is imperative that the government focuses on exploring strategies to enhance investor engagement and attract both domestic and foreign investors.
While seeking private investments for infrastructure projects, suitable concession agreements must be drafted to ensure the long-term operation of projects across various sectors. It is also necessary to determine the long-term sustainability and financial viability of projects.
The net worth of the banking sector and financial institutions has not kept pace with the growth and scale of project costs. This is a significant gap that needs to be addressed. Restructuring is to be looked at from a fresh perspective and existing regulations governing restructuring in India need to be reviewed so that lenders are able to ensure efficient utilisation of capital.
As far as procurement models are concerned, we see that merely 2 per cent of the total projects within the road sector are build-operate-transfer (BOT) projects, while 36 per cent are hybrid annuity model projects, with the remaining being under the engineering, procurement and construction model. There needs to be a shift in the allocation of project modes. To achieve this objective, it is imperative to scrutinise the reforms in concessions, enhance transparency in termination procedures and other operational challenges faced by projects, and mitigate delays by involving lenders as signatories in tripartite agreements.
It is also essential to conduct constant analysis of traffic forecasts and actual figures to ensure investors are apprised of appropriate information. Additionally, as per the latest industry trends, a nuanced approach to structuring distinct credit lines across different multilateral agencies, tailored to specific sectors, is imperative.
Contractual obligations possess a greater degree of enforceability. This also necessitates the implementation of a comprehensive and all-encompassing legal framework that is uniformly applicable to the entirety of India’s infrastructure.
Further, it has been observed that in certain cases, banks/NBFCs are resorting to lending solo in the infrastructure financing space. Given that infrastructure projects are big-ticket projects, this approach not only creates huge insolvency risks for the solitary lender, but also introduces market imperfections. Restriction on the quantum of lending, let us say, up to Rs 5 billion, by a single lender, may be imposed by the Reserve Bank of India (RBI). Beyond this limit, lending could be mandated under a consortium arrangement. This would facilitate better risk distribution and reduce the insolvency risk for single lenders.
Future plans towards sustainability
The growing domain of clean energy presents favourable opportunities for IIFCL. Notwithstanding the obstacles, the sector offers an optimistic future. To achieve the sustainable development goals by 2030 and net zero emissions by 2050, significant investment in sustainable and resilient infrastructure is required. As per IIFCL, herein lies the potential for infrastructure project financing on a long-term basis. Hence, this will be an important endeavour for the lender in the future.
IIFCL is in the process of creating a green bond framework to raise money from domestic markets in green bonds. The company has also initiated the process to avail of a line of credit from ADB for a total of $500 million (Rs 41.37 billion) for funding in sectors such as social and healthcare infrastructure development, energy generation and access, low emission transportation, smart cities and e-mobility.
