Infra projects to get credit boost

The government is expected to clear a new financing tool on Friday, which would help infrastructure project developers access funds at a cheaper rate based on a guarantee and also free funds for banks to lend to industry and retail borrowers. To begin with, this product-called credit enhancement-would provide funding support of around Rs 15,000 crore.

The proposal, which will be considered by the finance ministry, envisages a guarantee by government-promoted India Infrastructure Finance Co (IIFCL), which will subscribe to 25-50 per cent of the bonds being issued by the infrastructure company. This will be backed by an insurance cover by the Asian Development Bank (ADB) to the tune of 50 per cent of IIFCL's exposure, which in any case enjoys sovereign guarantee.

For instance, a special-purpose vehicle floated by companies like GMR, Larsen & Toubro or GVK to construct an airport is raising Rs 4,000 crore debt by issuing bonds. Once credit enhancement is allowed , IIFCL will subscribe to bonds to the tune of Rs 1,000 crore. Of this, Rs 500 crore will be insured by ADB, while the remaining will enjoy government guarantee by virtue of sovereign guarantee of IIFCL.

As a result of the credit enhancement , the SPV's rating would go up from BBB or BBB to AA, making it investment grade for long-term players such as pension and infrastructure companies. So far, these investors have shied away from putting money in infrastructure projects as norms stipulate a minimum rating of AA for them to invest. "Credit enhancement has a twin advantage. It will ensure that the projects are funded for longer tenure and also help maintain interest rate stability since banks reset interest rates," said an IIFCL executive.