Infrastructure financing has improved significantly over the years with the availability of flexible structures, more financing avenues and the increasing role of global funds. Sectors such as roads, renewable energy and logistics continue to receive significant investments through asset monetisation, platforms, strategic deals, etc. However, the investment opportunity has expanded across other sectors such as airports, data centres and clean mobility. As the net worth of the banking sector and financial institutions has not kept pace with the growth and scale of project costs, development financial institutions such as India Infrastructure Finance Company Limited (IIFCL) and National Bank of Financing Infrastructure and Development (NaBFID) are required to play a bigger role in project financing, particularly greenfield construction. A 33 per cent increase in budgetary outlay towards infrastructure to Rs 10 trillion 2023-24 sends a positive signal to the private sector and investor community, which are tapping opportunities in the infrastructure market through public-private partnerships (PPPs), co-investments and control transactions.
Positive stance of commercial banks
Commercial banks, being the traditional financiers of the infrastructure sector, continue to remain bullish on the sector’s growth prospects. Gross bank credit to the infrastructure sector increased by 0.7 per cent in 2022-23 over the previous year. However, this growth is less than that seen in 2021-22 when bank lending to the sector increased by 6.4 per cent over 2020-21. Sectors including power, roads and airports have been contributing to the credit growth in the past two years. Public sector banks such as the State Bank of India (SBI), Bank of Baroda, Canara Bank, and Bank of India have seen infrastructure lending ballooning during this time.
Higher capital expenditure by the government, mature model concession agreements and stronger regulatory frameworks have improved the confidence of banks in the infrastructure sector. To put numbers into perspective, non-performing assets (NPAs) were the highest in the infrastructure sector during 2007-15. In 2015, the infrastructure sector constituted about 30 per cent share in the total stressed advances. The gross NPA ratio of the sector has significantly reduced to 3.6 per cent as of March 2023, thus showing an overall improvement in asset quality and reduced risk of slippage.
Growing role of InvITs
Infrastructure investment trusts (InvITs) have become an important product for asset monetisation, especially for roads, transmission and renewable energy. Regulatory support has helped the product to take off. As of November 30, 2023, there are 23 InvITs registered with the Securities and Exchange Board of India, with the combined net asset value exceeding Rs 2.5 trillion. Two warehousing InvITs have been the most recent additions to the expanding InvIT market. A surge in fund raising activity is also being seen – Cube Highways InvIT raised $630 million from a clutch of investors; NHAI’s InvIT raised funds through follow-on issuance and NCDs, etc. Additionally, the National Monetisation Pipeline plans to recycle around Rs 6 trillion worth of government infrastructure assets by 2025. Many of these assets will find their way into InvITs and present an investment opportunity for investors.
When the InvIT was first introduced, foreign institutional investors were the dominant investor class which understood business trusts. However, today, InvITs have seen participation from insurance companies, pension funds, commercial banks, financial institutions and foreign portfolio investors, among others. Going forward, the InvIT ecosystem will witness growth similar to that of mutual funds. Many new sectors will also form InvITs in the times to come. The concept of self-sponsored InvITs will help in the creation of professionally managed platforms.
Bonding with bonds
The country’s corporate bond market has grown over the years. The outstanding stock of corporate bonds has increased fourfold from Rs 12 trillion in 2012 to Rs 45 trillion in 2023. The infrastructure sector has accounted for approximately 15 per cent of the overall bond issuances in recent years. A number of regulatory measures have been undertaken to incentivise an extensive investor base; however, the share of public issues continues to be low. SEBI’s initiative to reduce the ticket size from Rs 1 million to Rs 0.1 million starting January 1, 2023 has enabled higher retail investor participation which has increased from a mere 0.7 per cent in 2021-22 to 2 per cent in 2022-23 with a potential for further increase in the near future.
The increasing demand for credit from the infrastructure sector has encouraged banks to raise long-term capital by issuing infrastructure bonds with a tenor of 7-10 years. During April-November 2023-24, five banks together raised Rs 409 billion through infrastructure bonds, which is double the amount raised through such bonds in the whole of 2022-23, as per data from JM Financial Services. Large public sector banks, including SBI, Canara Bank, and Bank of Baroda, accounted for 88 per cent of the total funds raised through infrastructure bonds. Two private sector lenders – ICICI Bank and Kotak Mahindra Bank – together raised around Rs 60 billion. NaBFID, this year, raised Rs 100 billion through its maiden issuance of listed bonds with an approval to raise a total of Rs 300 billion via long-term bonds.
Over the past few years, India has incorporated green bonds into its climate finance strategy. A landmark initiative was the launch of the country’s first sovereign green bond worth Rs 160 billion in early 2023, indicative of a growing policy commitment to increase the domestic financing capacity.
Catalysing long-term finance
Institutions such as the National Investment and Infrastructure Fund (NIIF) and NaBFID have been set up to mobilise the flow of equity and debt capital from across the world into Indian infrastructure projects. The NIIF has been investing across various segments including roads, airports, ports, logistics, renewable energy, data centres, and e-mobility. It recently entered into a collaboration with the Japan Bank for International Cooperation to launch a $600 million India-Japan Fund for promoting Japanese investments in India’s environmental sustainability and low carbon emission strategies. The quasi sovereign wealth fund (SWF) has also developed an infrastructure debt financing company, the loan book of which expanded by almost 25 per cent in 2022-23, with not a single NPA. Backed by the likes of the Abu Dhabi Investment Authority, CPP Investments, Temasek, and the Asian Development Bank, among others, the NIIF is certainly playing a crucial role as an asset management and investment platform to meet the burgeoning capital needs of the infrastructure sector.
Talking about scale, NaBFID started operations with an upfront equity injection of Rs 200 billion and is targeting a disbursement of Rs 600 billion and sanctions of Rs 1 trillion in 2023-24. The institution has the capability to raise funds at a competitive cost and provide long – tenor funding to infrastructure projects through takeout financing, thus playing a complementary role to IIFCL. Besides financing, NaBFID is also venturing into the advisory space by partnering with the International Finance Corporation to provide transaction advisory services for developing PPP projects. The initial projects are expected to mobilise around $2 billion in private investment over the next few years in sectors such as renewable energy, energy storage and urban infrastructure.
Looking ahead
The setting up of the Infrastructure Finance Secretariat comes at an opportune time when the stage has been set for integrated infrastructure development with initiatives such as the National Infrastructure Pipeline and PM Gati Shakti. Its principle of acting as a guiding force for infrastructure stakeholders and capacity building initiatives for promoting PPPs will make a tangible difference in the times to come.
As per CRISIL, India will spend nearly Rs 143 trillion on infrastructure in seven fiscals through 2030, more than twice the approximately Rs 67 trillion spent in the previous seven years starting 2016-17. Of the total, approximately Rs 36.6 trillion will be green investments, marking a 5x rise compared with the period 2017-23. While sectors such as roads, renewable energy, logistics and power will continue to receive investments, non-conventional sectors such as green hydrogen, city gas distribution, e-mobility, data centres and urban infrastructure will witness an uptick in funding. Greater retail participation in InvITs, continuous asset monetisation, increased bond financing, and higher foreign investor participation will help the country meet its huge infrastructure investment needs.
Ishita Gupta