By Subhash Narayan
New Delhi, July 15 (IANS) The government has decided to provide capital support to a new credit enhancement non-banking finance company (NBFC) that will be set up this year by infrastructure financing firm, India Infrastructure Finance Co Ltd (IIFCL) in joint venture with the National Housing Bank (NHB) and the National Bank for Agriculture and Rural Development (Nabard).
An initial seed capital of Rs 500 crore has been provided to the IIFCL to set up a special purpose vehicle – National Infrastructure Credit Enhancement Ltd or NICE, which will function as a dedicated credit enhancement NBFC and bolster lower-rated bonds issued by companies in the sector.
More funds would be provided in subsequent budgets to strengthen the SPV that would ensure Rs 100 lakh crore investment required in infrastructure over the next five years.
“Token provision has been made for the new credit enhancement set up in the budget. The new entity would also get support from Sidbi, where Rs 5000 crore support has already been provided,” a top Finance Ministry official told IANS.
Presenting her maiden Budget, Finance Minister Nirmala Sitharaman has said that a credit guarantee enhancement corporation for which regulations have been notified by the Reserve Bank of India, will be set up in 2019-20. IANS first reported about government’s plan to announce the NBFC in this year’s Budget.
As per the blueprint of the new corporation finalized by the government, the IIFCL will hold 22.5 per cent stake in the new NBFC while the NHB and the Nabard could pick up to 10 per cent stake each.
The proposed NICE will set up a fund to attract infrastructure investments by insurance and pension funds to provide credit enhancement to infrastructure companies. However, its main job will be to act as a guarantor for lower-rated bonds issued by infrastructure companies. This would help these bonds to bolster their ratings.
As per RBI estimates, more than 85 per cent of corporate bond issuance in India is by borrowers with ratings of ‘A’ and above. The credit enhancement set up will help to bring even lower-rated borrowers in the bond market.
The proposal on credit enhancement fund was first announced in the budget for fiscal year 2016-17 by then Finance Minister Arun Jaitley. But since then, the scheme has not taken off due to various regulatory hurdles.
The Centre had earlier mooted the idea of IIFCL and several state-owned institutions like LIC, State Bank of India and Bank of Baroda to come together to set up a dedicated credit enhancement company. But IRDA regulations prevented the LIC from being part of the fund while banks could not participate due to rising NPAs and other commitments.
The government is looking to bolster infrastructure investment as it is key for boosting growth in the economy. It is estimated that India needs $4.5 trillion to be spent on infrastructure developments over the next 25 years, but it is expected to garner a lot less. Innovative funding and financing schemes is being looked to bridge the deficit and allow the sector to grow at desired pace.
(Subhash Narayan can be reached at [email protected])