The planned infrastructure debt funds (IDF) regulations are expected to retain the company and group exposure limits for banks, despite stiff lobbying by banks which want to get into the business.

Finance minister Pranab Mukherjee had projected the IDF as a key financial sector liberalisation step taken by the UPA government, in his comments to US secretary of state Hillary Clinton this month.

RBI has made it clear that any exposure by the banks to companies or groups either as sponsor of an IDF or on their own balance sheet will be clubbed together.

This is despite the finance ministry too negotiating with the RBI to relax exposure limits, an official from the ministry told FE. The ministry is keen to start road shows on the lines of those conducted by the department of disinvestment to popularise the infrastructure debt funds.

This effectively reduces the space for banks to increase their lending to any corporate entity. RBI has on several occasions made it clear that it views with concern any excessive concentration of risk by a bank, which could have systemic implications.

The ministry has also asked RBI to change the definition of ?net owned funds? as it does not include debt raised by a company. It has asked RBI to include at least 50% of the debt raised by a company in the net owned fund, so that it can raise more funds. This will raise the leveraging power of the funds substantially.

The debt funds are supposed to buy into the loans offered by banks for the infrastructure sector.

The sale of the papers will free the balance sheet of banks from asset liability mismatches as infrastructure loans tend to be longer than five years tenure while banks mobilise deposits largely on sub-five year tenor.

The funds are a good business opportunity for banks as these can be sponsored by any financial institution as per the guidelines issued by the finance ministry earlier. The IDFs will convert and sell long-term paper to institutions which want to invest in such issues like pension and insurance funds in India or abroad. Under RBI guidelines, credit exposure to a single borrower should not exceed the exposure norm of 15% of the bank’s capital funds,with an additional 5% (i.e. up to 20%) for infrastructure projects. Credit exposure to borrowers belonging to a group should not exceed the exposure norm of 40%.

The finance ministry which finalised the guidelines for the debt fund in June this year, allowed IDF to be set up either as a trust regulated by capital market regulator Securities and Exchange Board of India or as a company regulated by RBI. A trust-based IDF would normally be a mutual fund that would issue units, while a company-based IDF would be a form of NBFC (non-banking financial company) that would issue bonds. The IDF set up as an NBFC will mainly lend to public-private partnership (PPP) projects, whereas an IDF through the trust route will take care of the funding requirements of non-PPP projects such as those in the power sector.

While the Sebi board finalised its framework at its last meeting, the ministry is hopeful that RBI will issue the structure for IDFs soon. The debt fund to be regulated by RBI will raise resources through issue of either rupee or dollar denominated bonds of minimum five-year maturity, which would be tradeable among equivalent (domestic vs. foreign) investors. It could be set up by one or more sponsors, including NBFCs, infrastructure finance companies or banks.

India has huge infrastructure funding needs and intends to spend nearly $1 trillion in five years from 2012-2017 to shore up roads, ports, highways and airports to sustain rapid economic growth. Inadequate funding to the infrastructure funding has delayed the development of the sector. Under current regulations, Indian pension and insurance companies cannot invest directly in infrastructure projects, limiting a crucial source of finding. In the current Five-Year Plan that runs till March 31, 2012, such funds are likely to contribute less than 7% to total investment in projects.