How do you read the shortage in the funding for infrastructure?

So far, there are no viable infrastructure projects that have not got funding from Indian banks and institutions. The headroom is limited because the outstanding exposure of banks to infrastructure has gone up three times. If we don?t get our act together, we can continue to do what we?re doing. But if the 20,000 km of road a year is going to happen, then we need large sums of money; we?ve proposed an infrastructure debt fund and the government has to take a decision on this. If the projects that have been planned for the current Five Year Plan take off as scheduled, then there will be a shortage of Rs 2 lakh crore.

So how do we meet this shortfall?

If we?re to rustle up Rs 2 lakh crore, then banks and institutions will need to increase their funding. At IDFC, we feel we can double our assets this year because there is demand. It?s true banks are over-exposed, but institutions like REC, PFC and IIFCL do have resources. So some amount can be raised, though it?s difficult to say how much. Also, infrastructure projects do get delayed so the disbursements will be staggered, but we need to look at new avenues. We need to see how we can make infrastructure financing more attractive to foreign pension funds, foreign insurance companies, Indian pension and insurance funds and EPFO.

But will they take on the risks?

In the new infrastructure fund, we are trying to eliminate the risk by funding it after the asset starts earning. During the construction period, the banks will fund the project. Once the assets start earning, either by way of toll or user charges, then everyone wants lower interest rates because the risk is out since the construction is over, and the cash flows can be escrowed. That?s the stage globally, when insurance companies come in, pension, provident funds and sovereign funds. It is take-out financing, but after the construction is over, the cash flows come in through toll or user charges. The airports are getting huge user charges which can be put in an escrow and since there is a concession for 25 years, insurance companies would be happy to fund the project for that time.

Do you think it would be possible to channel retail savings into infrastructure?

Yes, of course. The FM has said he will come out with tax incentives for investments up to Rs 20,000. So lending institutions can raise money. An IIFCL, for instance, can pick up money if their bonds are tax-free, or even an SBI or IDFC. We have to tap retail money, because the bulk of money is in retail, and there is no other choice. And very few Indian insurance companies today, especially in the private sector, have money to invest in debt because most of their corpus is in ULIPs, which goes into equities. But why does LIC not do a 25-year-old loan? Because there?s no certainty on the risk. If you eliminate the risk, after construction, they will invest.

There have been some concerns on take-out financing…

It has not worked in the past because banks were reluctant to give up assets. The argument is why would banks give up assets after nurturing them? But they will get higher returns for the risk that they are taking. At HDFC, we fund developers at 12-13%, since it is construction finance, but once the building is ready and the tenants move, the same developer comes and pre-pays us because he accesses cheaper money.