The Asian Development Bank (ADB) has approved a facility ? first for India ? aiming to give a push to the country?s infrastructure bond market and help channelise huge funds of domestic and international pension and insurance funds into the infrastructure sector.
Under this $128-million (R716.8 crore) facility, developed with India Infrastructure Finance Company Limited (IIFCL), ADB and domestic finance companies will provide partial credit guarantees on rupee-denominated bonds issued by Indian companies to finance infrastructure projects, ADB said in a statement.
ADB will then take on a part of that guarantee risk, it added. The infrastructure developer expected to benefit from the facility is GMR Group, which is seeking to sell a bond to refinance a loan taken to build and operate part of a toll expressway linking Hyderabad and Bangalore, according to ADB.
Over next three years, the facility will provide partial guarantees on up to five infrastructure project bonds, it said. Currently, banks provide the vast majority of infrastructure loans, but are now reaching their lending limits. Infrastructure bonds, meanwhile, have not been used, despite an enormous pool of savings which need a long term home with strong and stable returns. The partial credit guarantees will boost the credit rating of a typical infrastructure project from BBB- or A to AA. This will allow pension funds and insurers, which can only invest in assets, graded AA or above, to buy the bonds, the ADB statement said.
?Replacing bank debt with bonds will, in turn, allow banks more room to provide loans to other infrastructure projects and businesses. In time, international investors are also expected to look to buy Indian bonds,? it said. ?Mobilising additional funds is essential if India is to meet its enormous infrastructure financing needs. Plus, it?s important to prevent over-reliance on bank financing and to ensure that capital markets play a financing and risk mitigation role,? said Vivek Rao, senior finance specialist in ADB?s South Asia Department. Having proven the concept, ADB then expects that such credit guarantees will become well established in the market and ADB can move on to support Indian infrastructure development in other ways.
?Credit enhancement will provide the critical missing link which will allow insurance companies and pension funds to put their sizeable cash to work in the infrastructure sector,? said Siddhartha Shah, senior investment specialist in ADB?s Private Sector Operations Department.