New NBFC to ease credit for infra projects on cards

New Delhi: The government may prepare a roadmap to establish a new non-banking financial company (NBFC) to give a push to infrastructure projects by enabling easier credit financing, two people aware of the matter said.

The NBFC would act as a guarantor for lower-rated infrastructure bonds, which would improve the ratings of projects. This would, in turn, improve the credit risk profile of infrastructure companies, and allow them to secure funding on more favourable terms.

Such an institution would also allow more long-term funds to be invested in the sector. This roadmap may be unveiled in the upcoming budget, and details of the entity including its structure may be finalized next fiscal (FY25), the first person mentioned above said.

Financing infrastructure projects has become critical, necessitating the creation of large dedicated financial institutions, the person added. Investments to the tune of ₹8-9 trillion are being made in infrastructure every year.

A finance ministry spokesperson didn’t respond to emailed queries.

Experts said infrastructure projects would benefit significantly from a dedicated credit enhancement body as it would ensure investments required over the medium to long term are realized.

Sanjay Agarwal, senior director, Care Ratings Ltd, said that an NBFC providing guarantees to improve the credit risk profile of infrastructure companies will help infrastructure projects initiated by states and even at district levels, which have funding challenges due to various reasons including operational and political.

“Infrastructure projects like renewables and roads are well-financed. However, some projects by state governments, especially last mile schemes, need financing,” he added.

The plan to set up such an NBFC to augment capital availability for infrastructure financing was first announced by finance minister Nirmala Sitharaman in the 2019-20 budget. However, its launch has been delayed due to disagreements among different government departments during extended inter-ministerial consultations, said the second person mentioned above.

An earlier plan included setting up a Credit Guarantee Enhancement Corp. or National Infrastructure Credit Enhancement Ltd with an initial authorized capital of ₹20,000 crore and equity participation from other state-run financial institutions.

The government has finalized an infrastructure pipeline with a projected investment of ₹111 trillion for FY20-25.

Moreover, now a Vision 2047 plan has been finalized that would create a fresh pipeline of infrastructure projects, which makes a credit guarantee enhancement NBFC relevant. Also, the need for credit enhancement has become crucial after the pandemic, which put many infrastructure companies under stress.

A credit enhancement structure can help address the infrastructure sector’s challenges by ensuring companies have easy access to liquidity for fresh investments.

The existing mechanism of credit guarantee is limited to entities such as the IIFCL (India Infrastructure Finance Co. Ltd) that have provided only about ₹250-300 crore annually over the past 6-7 years.

In this situation, a dedicated entity providing a single window credit guarantee facility to infrastructure projects having partnerships with multilateral agencies would bring a big support to the sector.