Crisis-hit infra financiers look at FM with hope

Housing finance providers expects liquidity window against sale of secured loans and access to NHB refinance facility

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Crisis-hit infra financiers look at FM with hope

With the upcoming Budget interim one, the scope of the government to address a wide range of issues affecting the industrial and infrastructure sector is restricted.

With that in mind, affordable housing would likely to be a key aspect of the Budget with growing expectation of interest rate subvention and tax exemption limit for EMIs on housing loans particularly for affordable housing are gaining ground.

On the financing side, the providers of housing finance expect liquidity window against the sale of secured loans and permitting all housing finance companies to access to NHB refinance facility.

These form part of the wish list presented before the government by the financiers.

"While our asset side is subject to regulation which has been harmonised with that of banks, the liability side i.e. fund raising activity still remains highly restricted, thereby creating a liquidity crunch for the sector," said Hemant Kanoria, chairman cum managing director, of Srei Infrastructure Finance.

The shadow of the IL&FS crisis continues to cast a gloom over revival in financing of infrastructure projects with banks and even specialised institutions turning shy of supporting long term infrastructure projects including sectors like equipment and housing financing.

And with the insolvency and bankruptcy courts still trying to find a way for resolving the crisis, uncertainty would continue to dog infrastructure financing.

A case in point: two subsidiaries of IL&FS, Jharkhand Road Projects Implementation Co and West Gujarat Expressway have recently decided to stop further loan repayments and even demanded refund of debt payments made after October 15 and expressing an intention to stop further repayments in response to an order of National Company Law Appellate Tribunal overturning an order of National Company Law Tribunal that had rejected the plea for moratorium on IL&FS' moratorium on debt repayments.

This could put at risk infrastructure project financing using special purpose vehicles (SPVs), says India Ratings and Research.

Even though these two SPVs generate sufficient cash, their refusal to stop payments may force raters to downgraded them to default grade.

At the heart of the confusion is whether a moratorium would impact various escrow accounts that were opened to provide safety to the lenders of various infrastructure projects that these SPVs took up.

The new Board of IL&FS headed by Uday Kotak is of a view that individual lenders have access to cash trapped in escrow accounts ,which may lead to preferential payments and that moratorium is critical to curtail individual rights and actions of lenders.

The ratings centrally factors in SPV's ring-fenced nature from its parent companies.

"Such ring-fencing of cash flows and their prioritisation for debt servicing is a global norm in project finance, and a critical element of project financing in the Indian financial system," another rating agency CRISIL has said.

Lenders to at least five such SPV are exposed to the risk of any move by these companies to stop future debt repayments, and any default could also translate into termination of projects, India Ratings said.

The crisis continues to delay some major marquee infrastructure projects, including the Jojila tunnel, Asia's longest bi-directional road tunnel which was awarded to IL&FS and is now set for rebid by National Highways and Infrastructure Development Corp.

Further defaults would impact fund flow to the infrastructure sector when the sources of funds have itself dried up.

"The scare of the IL&FS crisis has been keeping the banks and the others from financing the sector," Kanoria said.

At the heart of the present crisis lies asset-liability mismatch that has continued to put infrastructure financing at a risk.

Banks act as financiers for most infrastructure projects and the repayment schedules are typically not commensurate with the cash flows. Faster recovery of debt creating undue stress on the project cash flows, interest rates reset every two years puts bank finance at a disadvantage, says India Ratings in a recent knowledge paper.

IDBI, IFCI, ICICI, and IDFC started their businesses as long-term development financial institutions and were formed to create bankable assets for the system. However, the inherent asset-liability mismatch in their books did not allow them to sustain their true form over the long run.

"While infrastructure funding is chiefly done through project banks loans and equity, there is a dire need to broad-base the funding options, such as capital market transactions involving a diverse set of investors. An efficient market requires a stronger institutional framework for resolving disputes and ensuring proficient management of risks," the paper says.

While credit enhancement products are in the nascent stage at present, recent entry of long-term private equity capital and diversity of debt investors would go a long way in constructing a strong capital market, it says.

With normal sources of funds drying up for the infrastructure sector, there's a rise of other avenues like InfraInvt trusts and Alternative Investment Funds for financing the sector

During the last Budget, finance minister Arun Jaitley spoke of creating a facilitating environment for AIFs like private equities and venture funds prodding road financier National Highways Authority of India and other central public sector enterprises to tap this route.

But investment in infrastructure sector through the AIF route didn't pick up much at least till June end, up to which data is available with market regulator Sebi.

As of June end, cumulative funds raised by Infrastructure funds under category 1 AIFs have in fact fallen to Rs 5,255 crore from Rs 5,734 crore till March 2018.

Infrastructure Investment Trust, an innovative financing vehicle offering tax-efficient, dividend-paying investment avenue which can be used by infrastructure developers to monetise existing assets and reduce leverage levels.

Currently, there are about five InvIT from entities GMR, Power Grid, IRB, MEP, Reliance Infra, with India Grid Trust planning to now raise Rs 3,000 crore QIP to take over power assets.

Who is funding infrastructure

Banks – Rs 9.37 Trillion

ECBs – $9.38 Billion

Private Equity – Rs 475.0 Billion

IPO – Rs 14.0 Billion

Multilateral funds – $6.6 Billion

Data till September 2018 
Source: Infrastructure India

Foreign direct investment in infrastructure 
($ billion)

2.97 – FY14

5.65 – FY15

3.92 – FY16

8.46 – FY17

10.74 – FY18

3.2 – FY19*

*till June 2018
Source: Deptt of Industrial Policy and Promotion

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