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Infrastructure Finance in India

  • The year 2017 has been challenging for the Indian economy so far. GDP growth fell to 5.7 per cent in the first quarter of 2017-18, the lowest in the past three years. Poor performance of the external sector, which was hit by a strong rupee, the lingering impact of demonetisation and the roll-out of GST, are the key factors contributing to this decline. A rise in the current account deficit and inflation has further added to the worries.

  • Amidst the slowdown, the infrastructure financing scenario has become even more challenging. Capital costs are high, infrastructure companies are highly leveraged and there is a scarcity of long-term funding sources.

  • It is estimated that the infrastructure sectors require about $1.5 trillion of investments in the next 10 years. In recognition of this, it has become important to recycle capital to enable fresh investments. At the same time, focused attention needs to be given to introducing sources that can attract long-term institutional investors.

  • Stressed assets from infrastructure still account for about one-fifth of the total bank credit. While a number of schemes have been introduced to address the issue of stressed assets - the Joint Lenders’ Forum (JLF) corrective action plan, 5/25 restructuring, the Strategic Debt Restructuring (SDR) scheme, and the Scheme for Sustainable Structuring of Stressed Assets (S4A) - most have met with limited success.

  • The introduction of IBC 2016 is expected to expedite the stressed assets resolution mechanism, albeit at the cost of high provisioning by banks.

  • Meanwhile new funding avenues have been introduced in the past couple of years. Initiatives such as the National Infrastructure Investment Fund (NIIF), the New Development Bank (NDB), Infrastructure Investments Trusts (InvITs), IDFs, etc. have opened up avenues to raise funds for completed infrastructure projects and unlock the invested capital.

  • However, most of these have been slow to pick up and have met with limited success. The NIIF, set up with a corpus of Rs 400 billion, has been able to receive commitment from only one investor, Abu Dhabi Investment Authority, till date. NDB, on the other hand, has been able to provide a few loans, worth $1.07 billion, to various infrastructure projects. InvITs have finally moved forward with IRB Infrastructure Developers and Sterlite Power Grid Ventures kick-starting the activity in this segment.

  • As far as IDFs are concerned, there have been few takers for the instrument despite regulatory easing. The biggest hindrance in the take-off of the instrument is the unwillingness of banks to relinquish operational projects amidst weak credit growth.

  • Another notable trend has been the changing strategies of PE players regarding operational assets, most prominent in the road and power sectors. While such transactions help the offloading promoters to pare their outstanding debt, it also suits the changed strategy of PE firms that are scouting for such assets that give them consistent cash flows. Valuations also appear to be more realistic, weighed towards the buyers.

  • The bond market for the infrastructure sector looks more promising than ever before. Some notable policy developments have led to increased funding from this source. These include allowing foreign portfolio investors to invest directly, increase in partial credit enhancement provided by banks from 20 per cent to 50 per cent, allowing commercial banks to issue masala bonds, etc. At the same time, funding from public financing institutions is also increasing.

  • These new and enabling sources are certainly promising greater participation by global and long-term investors. The overall sentiment seems positive amongst PE firms, venture capital firms, foreign pension and insurance funds.

  • The mission of this conference is to examine the progress of new funding sources and instruments for financing infrastructure, highlight the challenges and discuss the way forward.

Debt Restructuring and Refinancing

  • The gross NPAs of banks currently stand at about Rs 8 trillion, accounting for 12 per cent of the total bank loans. This is expected to further increase to 13-14 per cent by March 2018.

  • About one fifth of the stressed loans of banks belong to the infrastructure sectors. Fresh lending to the sector has been falling consistently.

  • A number of initiatives have been taken by the government in the past to address the issue of stressed assets. Restructuring schemes such as joint lenders’ forum (JLF) corrective action plan, 5/25 restructuring, strategic debt restructuring (SDR), and the Scheme for Sustainable Structuring of Stressed Assets (S4A) have been introduced, but these have met with limited success.

  • The stress advances ratio for infrastructure declined marginally from 18.6 per cent to 18.3 per cent between September 2016 and March 2017.

  • While the 5/25 scheme is restricted to operational projects, under the SDR scheme, the revival or takeover of an entity within 18 months is difficult to execute. Moreover, under SDR, banks are facing difficulty in finding buyers for the underlying assets. Other challenges include complex legal procedures and arriving at a fair valuation in the conversion of debt to equity.

  • The S4A scheme also suffers from a number of challenges. One of its key limitations is that it does not factor in the future cash flows to determine the sustainable debt. In addition, it lacks flexibility in pricing and tenure adjustment, and requires high provisioning by banks.

  • The new Insolvency and Bankruptcy Code (IBC), which came into effect in December 2016 has introduced a consolidated legal framework for resolving the issue of defaults by infrastructure companies and partnership firms in a time-bound manner. The code supersedes all extant insolvency laws. While IBC 2016 is expected to play a key role in NPA revival, much of its success would depend on its implementation.

  • Meanwhile, only a handful of asset reconstruction companies (ARCs) have been active in resolving the issue of stressed assets, which has prompted RBI to issue fresh licences. Moreover, banks have been reluctant to sell assets to ARCs and take a hair cut on their loans.

  • New funds are also being set up in joint venture with PE firms and global investors to invest in stressed assets. Some of the recent joint ventures in this regard are IL&FS-Lone Star Funds, Piramal Enterprises-Bain Capital Credit, etc.

  • While all these initiatives have been important steps in resolving the issue of stressed assets, it remains the biggest concern for the Indian financial sector. The stressed companies will still take some time to deleverage to sustainable levels, which in turn is expected to push the investment recovery cycle by a few years.

  • The need of the hour is the enhanced role of the government in addressing this issue. It has been proposed that a public sector asset rehabilitation agency be set up with strong backing from the state and central governments to buy the bigger NPAs. 

  • The mission of this conference is to examine the various schemes launched to address the issue of stressed assets, highlight the key challenges, and discuss the possible solutions and strategies.
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