Bharat SainiLast Updated on February 27, 2017 by Bharat Saini
India Infrastructure Finance Company Ltd (IIFCL) is working on modalities for a Rs.10000 crore dedicated fund to provide credit enhancement for commercially viable infrastructure projects. This fund will give a boost to massive investment required for India’s infrastructure. This fund, through unconditional and irrevocable partial credit guarantee, will help enhance the credit rating of bonds issued by infrastructure firms so that they, in turn, can attract long-term investments especially from global insurance, pension and sovereign wealth funds.
Credit enhancement is the improvement of the credit profile of a structured financial transaction or the methods used to improve the credit profiles of such products or transactions. Credit enhancement improves debt or credit worthiness of the company. Through credit enhancement, the lender is provided with additional collateral security, insurance, or a third party guarantee. Credit enhancement reduces credit/default reassurance that the borrower will honor the obligation through additional collateral risk of a debt, thereby increasing the overall credit rating and lowering interest rates.
The dedicated fund will be in the form of a Special Purpose Vehicle (SPV) and will be a NBFC-Infrastructure Finance Company and its promoters are likely to include LIC, General Insurance Corporation of India, SBI, Indian Renewable Energy Development Agency besides IIFCL and others. The fund will help enhance the credit rating of bonds issued by infrastructure firms so that they can attract long-term investments especially from global insurance, pension and sovereign wealth funds. The government is keen on roping in international financial institutions such as ADB, AIIB, New Development Bank (formerly BRICS Development Bank), International Finance Corporation. A majority of the around 1500 infrastructure projects in the country in various stages of development are rated at BBB-level. The dedicated fund can help enhance this rating and help them raise more funds, especially from overseas investors who invest only in higher-rated (AA) projects.
Prior to the setting up of the dedicated fund, the Reserve Bank of India is expected to bring out a comprehensive regulatory framework for credit enhancement to infrastructure projects and Non-Banking Finance Companies (NBFC) keen on the business. The central bank’s norms for credit enhancement products will include capital requirement and asset classification.
This dedicated fund by providing credit enhancement will help improve credit profiles and thereby reduce significantly the cost of infrastructure sector requiring investments of more than $1.5 trillion in the coming ten years.
