The road ahead looks promising for infrastructure financing. A number of alternative and long-term funding avenues are being explored. These, along with bank lending and international loans, have kept up the pace of infrastructure development. In an interview with Indian Infrastructure, Dr P. R. Jaishankar, Managing Director, India Infrastructure Finance Company Limited (IIFCL), talks about the company’s recent initiatives and priority areas, future financing requirements, potential new products, and the regulatory measures needed for long-term financing…
What have been IIFCL’s key achievements in the past one year?
IIFCL has demonstrated robust growth, maintaining a CAGR of 20 per cent in its loan book. The company’s journey has been coterminous with the sector’s growth trajectory.
In terms of financial metrics, IIFCL has reported substantial progress. Four years ago, the company’s total loan book stood at Rs 340 billion. However, disbursements for the last 12 months have reached around Rs 230 billion. Profitability has also shown strong improvement, with profit before taxes amounting to around Rs 20 billion and net profit in the range of Rs 15 billion-Rs 16 billion. Returns on equity and assets have yielded promising results, with approximately 11.43 per cent return on equity and 2.53 per cent on assets.
Additionally, IIFCL has made significant strides in asset quality management. Non-performing assets (NPAs) have been reduced to nearly negligible levels, with gross NPAs at about 1.4 per cent and net NPAs in the range of 0.4-0.5 per cent. The company aims to further improve these metrics, targeting zero fresh NPAs in the current year. Around 91 per cent of the portfolio comprises externally rated A, AA and AAA assets, indicating a high quality loan book. Furthermore, it has expanded its research activities and is actively pursuing new product structuring innovations.
IIFCL is engaging with multilateral agencies to broaden market participation and introduce new players to the sector. It has already executed MoUs with several agencies and is focused on expanding long-term resources to enhance its capacity for long-term lending.
The company is in discussions with various government departments regarding the launch of new products. One such product is Project Completion Risk Insurance (PCRI), which aims to address issues relating to the timely release of termination payments to lenders. This product would require the concessioning authority to subscribe to insurance and effectively transfer the responsibility of making termination payments to insurance companies in case of a termination of projects due to any of the listed reasons. It would not only alleviate the financial burden on the exchequer, but also safeguard the interest of lenders. The structure is acceptable to many players with the Insurance Regulatory and Development Authority also in the loop.
Furthermore, IIFCL is venturing into a space where it will conduct due diligence of projects at the pre-bid stage. This move aims to improve the quality of bidding and enhance project-specific risk assessment.
What is the sectoral composition of the loan book, including the new sectors?
IIFCL has undergone a significant transformation in its portfolio composition. Initially concentrated on the road and power sectors, each comprising 40-45 per cent of its portfolio, the company has reduced this to about 30 per cent each, while expanding from 4-5 sectors earlier to almost 20-21 sectors now. The company has strategically expanded into new sectors such as airports, ports, mass rapid transport systems, renewable energy (wind and solar energy), data centres, urban sanitation, and urban transportation.
It has further extended its financing scope by leveraging the RBI’s allowance for 25 per cent non-infrastructure exposure on its balance sheet. The company is focusing on allied infrastructure sectors not currently listed in the harmonious list, such as e-mobility, and battery manufacturing and storage. These emerging areas are integral to reducing intermittency in power generation and supply. Looking ahead, IIFCL plans to intensify its focus on these sectors. This holistic approach is helping IIFCL to comprehensively address market needs and capitalise on emerging opportunities.
The company aims to expand its role in municipal bonds in the urban infrastructure space. Sectors such as water, and sanitation and sewage treatment plants are also a crucial part of the portfolio. While from a portfolio point of view, their share may be negligible, the social impact will be significant.
What are the targets for 2024-25?
IIFCL hopes to maintain growth similar to last year; however, base effect considerations may influence growth metrics. Last year, the company experienced a significant growth of 109 per cent in terms of profitability. Given the expanded base, the current year’s growth rate may differ; however, in terms of absolute performance, the growth is expected to be substantially higher.
For 2024-25, it has set a target to sanction over Rs 500 billion. Disbursements are projected to exceed those of the previous year by 10-15 per cent, potentially reaching Rs 250 billion.
The infrastructure pipeline demonstrates robust growth, underpinned by significant sanctions. This growth trajectory is expected to persist. With no new NPAs and stress in the loan book, profitability is expected to soar.
What are your top priorities, both short and medium term?
In the long term, IIFCL remains committed to maintaining its position as the most diversified infrastructure lender. It intends to explore new domains and activities, and aims to enhance its contribution to emerging infrastructure projects and development. For the short to medium term, the company will maintain its focus on asset quality. Concurrently, it will prioritise the augmentation of its capital base and net worth, ensuring sustainable financial growth.
What are some of the new activities that IIFCL may consider in another five years?
We will continue to strategically support important new infrastructure projects and also focus on asset recycling to spearhead financial assistance for the next phase of the infrastructure sector through investments in project bonds and lending to infrastructure investment trusts (InVITs). This will augment the flow of funds from the debt capital market and attract investors, both domestic and overseas, to the Indian infrastructure sector, thereby assisting in the de-risking of banks’ balance sheets.
Renewable energy and sustainability have emerged as key focus areas. The government’s defined targets of achieving net zero emissions by 2070 and reducing emissions by 45 per cent by 2030 present substantial investment opportunities. IIFCL has strategically aligned its business plan with the Government of India’s vision for achieving net zero emission targets. To support this, IIFCL is targeting 20 per cent of its disbursements in 2024-25 towards green and sustainable financing, specifically within the renewable energy sector. Additionally, a sustainable ESG financing framework has been introduced to facilitate the issuance of green bonds, along with a green finance framework for their appropriate deployment. This sustainability-driven approach is anticipated to have far-reaching implications, not only for infrastructure but for the overall economy. The road sector is expected to experience a shift towards more environmentally sustainable and traffic-efficient practices. It has attracted investments from sovereign wealth funds and private equity firms, particularly in completed projects. The emphasis on safety and environmental investments serves as a catalyst for these investments, as well as for improving road quality, ultimately benefiting users.
IIFCL Projects Ltd, a subsidiary of IIFCL that specialises in consultancy, financial advisory and infrastructure project advisory services, is expanding to emerging sectors such as aerospace, space utility vehicles and satellite vehicles. It is also actively seeking to help with the business plans of Hindustan Aeronautics Limited and the Indian Space Research Organisation. If these sectors are classified as infrastructure, they could significantly contribute to the expansion of the infrastructure sector. Meanwhile, IIFC(UK) Limited focuses on augmenting external commercial borrowings and addressing import finance requirements for infrastructure projects in India.
Through its newly established office in GIFT city, IIFCL intends to facilitate access to foreign funding channels and attract investors. Going forward, a triad between Delhi, London and GIFT city can help IIFCL remain competitive in the overseas lending market by having access to both international and domestic funds to reduce the landed cost of funds.
How has your relationship with the banks evolved over time?
Given the substantial funding requirements in infrastructure, banks remain crucial players. However, only a few major banks are engaged with infrastructure lending. Complementarity between all institutions is vital for infrastructure development. The bond market and InvITs have gained traction, attracting increased investor interest. New sectors such as warehousing and data centres are also witnessing InvIT uptake. These alternative financing sources can supplement loan generation. Greenfield projects can be financed by traditional institutions and emerging investment instruments can cater to other asset classes.
Completed projects, as a separate asset class, are a boon for the sector. Considering the current market size, if the outstanding loans are approximately Rs 30 trillion and 35-40 per cent of the projects are completed, this represents substantial growth potential for the sector. This trend facilitates asset monetisation and new asset generation without additional capital requirements.
IIFCL is strategically focusing on shoring up long-term debt, while also exploring medium-term debt capital markets in various economies. It is considering new hedging strategies to structure medium-term debt instruments, potentially reducing overall funding costs. To this end, discussions with a few banks are under way.
What are some of the government initiatives that have helped? What are your recommendations to further improve infrastructure financing?
The government’s initiatives to strengthen the framework for public-private partnerships (PPPs) have demonstrated efficacy. In recent years, there has been a concerted effort to revise and reform concession agreements. The new clauses have contributed to enhancing investor confidence. However, significant room for further improvement exists.
The emergence of new sectors, coupled with government interventions to promote projects in the absence of private capital, has sustained infrastructure development. Further, in the past year, substantial budgetary allocations have been directed towards infrastructure, with spending trends aligning closely.
The current pace of growth is commendable. Given the evolving market environment and continued government support, IIFCL maintains an optimistic outlook for the sector’s future. Additional legislative and regulatory changes could potentially accelerate the growth further. A key recommendation for consideration is the inclusion of lenders in the PPP process as defined parties. This will enable lenders to be a part of the key discussions and decisions relating to issues in the project, thereby enhancing project bankability and boosting lender confidence.
