| |
Aug 10, 2010
Indian infra's best foot forward?
Most of the (non banking finance companies) NBFCs lending long term capital for infrastructure projects have recently been rechristened. They have now been classified as infrastructure financing companies (IFCs). They now have certain privileges which are different from regular NBFCs. These companies provide long term financing, and infra development is one of our government's major priorities. Thus it was important to have a special category of NBFCs catering to this sector.
An IFC has been defined to mean an NBFC which deploys at least 75% of its total assets in 'infrastructure loans'. These loans include credit facilities extended through loans, subscription to bonds, debentures, preference shares or equity shares in a project company. Investments in the creation of roads, highways, ports, airports, industrial parks, irrigation, power etc. are all part of this category.
A new status...
| Criteria |
NBFC |
IFC |
| Capital adequacy ratio (%) |
12 |
15 |
| Can issue tax-free bonds |
No |
Yes |
| Concentration of credit |
|
|
| Single borrower (%) |
10 |
25 |
| Single group of borrowers (%) |
15 |
40 |
| Overseas borrowings (ECBs) |
Approval |
Automatic |
| Bank borrowings (% of capital funds) |
15 |
20 |
| Risk weights of banks' finance |
100 |
20 |
Source: RBI press release, news articles
India needs a massive investment of about US$ 1.5 trillion in infrastructure over the next three to five years. The government expects funds of US$ 500 bn in infrastructure in the 11th Plan period ending FY12, and has doubled the target to over US$ 1 trillion for the 12th Plan. In order to achieve this, large funds need to be mobilised. These IFCs now have the ability to raise cheap funds from overseas (external commercial borrowings - ECBs) through the automatic (without approval) route. This can equal upto 50% of their net worth. ECBs are usually attractively priced at around 0.2% above Libor (London Interbank Offered Rate). This helps companies diversify risks, and benefit from lower interest rates prevailing overseas.
Bank lending to this sector can also increase, and with the lower risk weightage for lending to IFCs, they will be able to get more funding, at cheaper rates. These IFCs can also raise 25% of their incremental investment in infrastructure as tax free infra bonds. Retail investors can apply to the same. By incremental investment, we mean the additional investment over the previous year dedicated to the infrastructure sector. The bonds have the potential to raise about US$ 6.5 bn in FY11, according to government estimates.
This investment tool is ideal for retail investors with incomes between Rs 300,000 to 1 m per annum. An individual can invest as much as Rs 20,000 in these infrastructure bonds to claim fiscal benefits,. That is if they wish to claim additional tax benefit apart from the Rs 100,000 permitted under section 80 (C). These bonds will have a minimum tenure of 10 years, with a 5 year lock in.
NBFCs such as PFC, IDFC, L&T Infra, etc. have already been granted the new IFC status. REC will also soon be following PFCs footsteps. This will help provide greater funding to the Indian power sector.
Peer comparison - IFCs - as of 1QFY11
| Criteria |
PFC |
IDFC |
REC |
| Networth (Rs bn) |
130 |
73 |
117 |
| Capital adequacy ratio - CAR (%) # |
17 |
19 |
15 |
| Loan book (Rs bn) |
856 |
289 |
692 |
| Net NPAs (as a % of loans) * |
0.01 |
0.15 |
0.03 |
| NIMs (%) |
4.1 |
3.3 |
4.4 |
| Foreign currency borrowings (Rs bn) |
28 |
21 |
22 |
Notes: # For REC, the CAR is of FY10; * For REC, the NPAs are gross NPAs
Source: Company presentation
Most of the new IFCs have either raised fresh capital, or are looking to raise capital so that they can get cheaper funds via the ECB route. PFC and REC also need to improve their capital adequacy (CAR) to comply with the new rules. IFCs are also seriously considering the option of raising tax free money through infra bonds. Most of their loans are also of high quality, judging by the negligible NPAs (non performing assets) in their portfolios.
The government is way behind schedule in its development plans. Last year, the government set a target of building 20 kilometers of roads a day, but is currently laying at less than 10 kilometers a day. These moves to boost funding into the space, seem to be a breakthrough. The only way for India to achieve sustained GDP growth will be through infra improvement.
A unit of the World Bank, plans to invest US$ 450-500 m in Indian infrastructure projects in FY11. These investments will be made through a mix of project finance, corporate finance and debt instruments and plans to focus on renewable energy. With big name investors gearing up, we hope that long term funding for this capital intensive sector will increase. And in turn lead to concrete developments in the space.
More Views on News
Aug 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?
Aug 10, 2017
HDFC starts FY18 on robust loan growth but asset quality slips on increased exposure to developer loans.
Jun 22, 2017
Demonetisation led slowdown coupled with shift to stringent bad loan norms keep Shriram Transport Finance on a slow wicket.
Jun 19, 2017
Should one subscribe to the IPO of CDSL Ltd?
Jun 14, 2017
Power Finance Corporation earnings hit by RBI mandated higher provision on state government power generation projects where the recovery continues to be 100%.
More Views on News
Most Popular
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
More
Copyright © Equitymaster Agora Research Private Limited. All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results. SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407 | |
|
|
Jagan
Aug 12, 2010Fine thinking and good analysis put into this article. kudos to the team!