K. Ravichandran, Executive Vice President and Chief Rating Officer, ICRA
Infrastructure credit in India has nearly doubled in the past decade to about Rs 30.7 trillion as of March 2024. While banks traditionally dominated this segment, the balance has gradually shifted in favour of non-banking finance companies (NBFCs), which accounted for over 55 per cent of the overall infrastructure financing credit as of March 2024. However, within the NBFC space, most private players have exited, and sovereign or quasi-sovereign NBFCs now dominate the market.
Earlier, the portfolio was dominated by sectors such as thermal and hydropower. There has been a gradual shift towards renewable energy. This decade has also been marked by the strengthening of these players’ balance sheets, with significant improvements in asset quality and reduction in funding costs.
Over the years, the government, along with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India, has implemented several policy measures to increase capital availability. Key initiatives include launch of the take out financing and credit enhancement schemes, creation of infrastructure debt funds (IDFs) and the National Investment and Infrastructure Fund (NIIF), relaxation of external commercial borrowing norms and setting up of a new development financial institution.
Another important development has been the implementation of the Insolvency and Bankruptcy Code. This has assisted lenders in the resolution and recovery of some stressed assets to an extent, although the dispute resolution track record still remains dismal.
The introduction of infrastructure investment trusts (InvITs) has also been a significant development. As the InvIT regulations have evolved, these trusts have become a preferred investment vehicle for many long-term global capital investors, such as pension and insurance funds, to invest in India’s infrastructure assets. InvITs have witnessed significant traction with multiple issuances, including those by PowerGrid and the National Highways Authority of India. Between April 2019 and July 2024, Rs 1.13 trillion was mobilised through this route. ICRA expects continued growth with more assets being monetised through this route over the medium term. In August 2023, the RBI also amended the regulations for IDFs, opening up more avenues for these entities to raise capital and debt.
The RBI recently issued draft guidelines for income recognition, asset classification and loan provisioning to rationalise existing guidelines and harmonise the same for all regulated entities undertaking project finance. These guidelines focus on more robust underwriting and information sharing among lenders. At the same time, a higher provisioning requirement for projects under implementation could impact profitability for these entities although this impact is expected to be spread over a three-year period. In addition, the project finance cost could increase as lenders incorporate extra provisioning costs into lending rates, affecting the viability of infrastructure projects.
For efficient and sustainable infrastructure development, encouraging private sector investments is crucial. Stable regulations and equitable risk sharing will help attract private sector investments. While the government has taken multiple steps in this direction, helping reduce bottlenecks in project implementation and improve the investment environment in the country, participation is still limited, mainly concentrated in select infrastructure segments like roads and renewable power. A similar trend is visible in infrastructure financing, with private players exiting this space and the overall participation remaining limited.
With the rise in infrastructure investments, the avenues for long-term credit for the sector need to be scaled up. In this regard, the increased pool of savings with insurance companies, the National Pension Scheme and provident funds has improved the availability of long-term funds at competitive rates during the past decade. Further strengthening the corporate bond market, with higher retail participation, could help channelise more public savings into infrastructure. A ramp-up in lending by National Bank for Financing Infrastructure and Development could also help bridge the gap.
Besides, InvITs can help attract long-term capital inflows into the sector. The NIIF can play a key role in channelising long-term equity capital into the sector. Infrastructure financing entities have also tapped foreign markets to raise long-term debt and diversify the lender base. However, recent appreciation in currencies like the Japanese yen exposes these entities to foreign exchange risk to some extent. Thus, prudent hedging policies are the need of the hour.
India’s infrastructure development requirements are immense. In the past, a high level of stressed assets impeded project implementation, dampened sentiment and hindered debt financing for projects. Therefore, caution is imperative regarding the quality of project execution, capacity building for industry players, and aggressive bidding activity.