While the last Budget unveiled the National Investment and Infrastructure Fund (NIIF) to catalyse financing of projects, the Centre may announce a Bond Guarantee Fund of India (BGFI) in the coming Budget to catalyse the nascent bond market for infrastructure firms.
The BGFI may be set up with an initial corpus of Rs 5,000-10,000 crore, in which the government may hold less than 49% stake to give the entity a private-sector character and the remaining equity could be shared with public sector and private sector companies as well as multilateral agencies like the Asian Development Bank, sources said.
“Currently, all the stakeholders views are being taken on the proposed BGFI,” an official, who did not wish to be named, told FE.
Bond investors in India are credit-risk averse and often prevented by policies from investing in lower rated instruments. Infrastructure projects are typically rated below AA in the initial stages, restricting their access to the bond market. To overcome this, the ADB had proposed a bond guarantee fund to give guarantees to long-term bond issuances by entities, improving their rating to AA and above. Setting up of the guarantee fund will complement the NIIF, which is being set up with an initial corpus of R40,000 crore for the development of commercially viable projects, both greenfield and brownfield, including stalled projects.
Scaling up infrastructure is a key focus area of the Modi government to match its higher economic growth ambitions.
Even though the government aimed infrastructure investment of about R67 trillion ($1 trillion) in the five years through March 31, 2017, it could fall short of the target by R12 trillion, according to an official of the India Infrastructure Finance Company (IIFCL). Historically, the government and banks have been the financier of infrastructure in the country. As the former must balance that with other spending priorities, and the latter must contend with asset-liability mismatches and weakening loan books, it was long-felt that the domestic bond market needed to be deepened.
Although the IIFCL is providing credit enhancements and the recent RBI guidelines will allow banks to provide the facility, a dedicated institution like BGFI would promote efficiency, give bigger guarantees and ultimately bring down interest cost of borrowers, analysts say. “IIFCL can guarantee a maximum 50% of bond principal while banks can guarantee up to 20%, but to achieve a rating of AA, most infrastructure projects require credit enhancement well above 20%. In neither case can they provide full 100% credit wrap necessary for an AAA rating, a must-have for some institutional investors,” said Don Lambert, senior finance specialist, ADB.