The centre is reviewing its plan of setting up a Credit Guarantee Enhancement Corporation in the light of similar facilities being already offered by existing government agencies. In the Union Budget announced on July 5, 2019, the government had announced plans for setting up a Credit Guarantee Enhancement Corporation, for which inter-ministerial discussions were held late last year. Such a company was expected to free up banks’ lending resources or around Rs 3 lakh crore.
With the government already moving swiftly to provide full credit guarantee against loan losses on MSMEs whose accounts are non-NPA (non-performing assets) and a partial guarantee to stressed micro, small and medium enterprises (MSMEs), there is a view in certain sections of the government that for infrastructure projects such a facility can be provided by existing companies like IIFCL instead of a new corporation being set up.
“We have held inter-ministerial discussions on this proposal and a draft plan was floated. The view now emerging is that state-owned companies are already working on providing partial guarantees to lift ratings of specific infrastructure projects and a new structure for a similar purpose may not be immediately required. But we are working on an action plan to deepen corporate bond market, which will address issue of providing credit enhancement by providing increased funding,” a government official said, asking not to be named.
The Finance Ministry had in January circulated a draft note on establishment of the credit enhancement company to all concerned ministries, with an aim to attract long-term capital from pension and insurance funds into infrastructure sector. Some government departments had expressed their reservations on this proposal.
A credit enhancement structure or a company helps in lifting the ratings of a specific project or that of a special purpose vehicle (SPV) executing that project. “Institutional investors in India are permitted to invest in infrastructure projects rated AA or above, but most of the ongoing infrastructure projects in India are rarely rated BBB or above, resulting in a significant mismatch between the extent of institutional investor credit available and actual credit requirement for financing infrastructure sector in India,” the task force on National Infrastructure Pipeline noted in its report in April, while arguing for setting up an entity proving credit enhancement.
Credit enhancement entities aid in augmenting the credit ratings of bonds of certain above-investment grade operational infrastructure projects, improving their attractiveness to institutional investors, by proving partial or full credit guarantees. This also lowers their cost of raising funds, improving the viability of infrastructure projects. The Finance Ministry did not reply to an email seeking comments for this story.
IIFCL currently provides partial guarantee to improve ratings of bonds issued by infrastructure companies to AA or higher for refinancing of existing loans. Under this scheme, IIFCL can undertake credit enhancement to the extent of 20 per cent of total project cost (or 40 per cent of total project cost with backstop guarantor), subject to a maximum of 50 per cent of the total amount of project bonds. Since the launch of the scheme in 2012, IIFCL sanctioned guarantees of over Rs 2,200 crore for bond issuances of more than Rs 8,000 crore in various infra projects, as per latest available annual report 2018-19 of the company.
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