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Giving PPP a boost PDF Print E-mail
Saturday, 24 September 2011 00:00
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If India’s infrastructure fails to take off, thanks to RBI’s notification on norms for infrastructure debt funds on Friday, it won’t be for lack of loans from commercial banks in the country. Since many commercial banks had reached or were reaching their ceilings for loans, especially given the huge asset-liability mismatches (borrowing short and lending long), infrastructure debt funds will be a big relief. More important, the way they have been structured, global insurance and pension funds will also be able to lend to them, theoretically increasing the available resource pool quite dramatically—right now, since most infrastructure bonds are rated BB or thereabouts, such funds cannot invest in them.

The way the infrastructure debt funds plan to get over this, to get ratings of AAA or thereabouts, is by dealing with precisely this issue. The real risk in any PPP project is really in the construction phase, and this is what lowers the rating; by mandating that infrastructure debt funds can only invest in projects which have at least a year of satisfactory commercial operations, this part of the risk has been taken care of. Similarly, since all projects have a termination clause and a payment on this eventuality, the major concerns of debtors are taken care of—in all cases, a minimum of 90% of the debt repayments are taken care of. A tripartite agreement is also being worked out to ensure that termination payments can be recovered by the infrastructure debt funds directly.

So, a company that borrows money from a bank can, after a year into commercial operations, issue bonds for 90% of the original debt, and sell these to an infrastructure debt fund. This frees up the bank to lend more to the company or to other infrastructure projects and also ensures there is no asset-liability mismatch. Currently, loans to the infrastructure sector carry a risk-weight of 100%, which lowers the bank’s interest in such lending. Once a project is a year old, RBI has said the paper issued on it has a risk-weight of 50%, making it more attractive for banks to park their money here as well. Whether global insurance and pension funds would like to invest in Indian infrastructure as this point in time remains to be seen, but there is little doubt this is an important initiative for the medium- to long-term.

Last Updated ( Friday, 25 November 2011 05:49 )
 

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