The government plans to set up a Credit Enhancement fund to support infrastructure projects that are rated below ‘AA’.
The fund will provide credit enhancement to such lower rated projects, enabling them to raise loans at better rates while improving their viability. “The proposal has been discussed a number of times. The idea is to either set up a professionally managed credit enhancement fund or a well capitalised institution for the same purpose,” a senior government official said.
Since institutional investors put in money only in top rated infrastructure projects, augmenting ratings of projects that are otherwise viable but do not have early cash flows, would help in attracting investors.
Sources said the Union Budget 2020-21, set to be presented on February 1, is expected to make an announcement in this regard. The Credit Enhancement fund can also be jointly run and managed by the government and private sector sector companies — just on the lines of the National Investment and Infrastructure Fund.
Will help lower rated projects raise funds
The Credit Enhancement fund will enable lower rated projects to raise loans at better rates while improving their viability. Since institutional investors put in money only in top-rated infrastructure projects, augmenting ratings of projects that are otherwise viable, but do not have early cash flows, would help in attracting investors.
Right now, most of the infrastructure projects are rated below ‘AA’, which essentially means large institutions do not fund such projects. Through credit enhancement, a borrower or a bond issuer tries to improve its credit worthiness, which helps in lowering interest outgo. A Credit Enhancement fund provides partial guarantee against loan losses to the lenders, enabling the borrower to enhance its credit ratings.
Such a facility can be provided to projects that have strong viability and visibility but the companies executing them presently have weak balance sheet or cash flows, which is usually the case for infra projects where revenues start accruing in later years. The agency providing the facility usually charges a fee for providing its services. A Finance Ministry panel that recently finalised the National Infrastructure Pipeline has also made the case for credit enhancement facility for infra projects, along with the need to channelise pension and insurance funds’ money into the infrastructure sector.
The Finance Ministry. last month, unveiled Rs 102 lakh crore of infrastructure projects that will be implemented between fiscal year 2020 and 2025, with the central government contributing nearly 39 per cent towards these projects, states accounting for another 39 per cent and the private sector 22 per cent. Of the total project capital expenditure during fiscals 2020 to 2025, sectors such as energy (24 per cent), urban (16 per cent), railways (13 per cent) and roads (19 per cent) are estimated to account for more than 70 per cent of the projected infrastructure investments in India.
The government’s push to improve funding for infra sector comes in the backdrop of eight core sectors’ production contracting by 1.5 per cent in November, the fourth consecutive month of contraction. Eight core sectors — coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity — are a lead indicator of industrial performance.
The collapse of Infrastructure Leasing & Financial Services (IL&FS) has created a funding void in the infrastructure sector, with many projects facing uncertainties and rating downgrades.
Apart from resulting in liquidity shortage last year and affecting NBFCs, the IL&FS fiasco has had a negative impact on funding availability for long duration infra projects.