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.
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 |
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.
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 |
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.
Equitymaster requests your view! Post a comment on "Indian infra's best foot forward?". Click here!
1 Responses to "Indian infra's best foot forward?"
IFCI share price is trading up by 13% and its current market price is Rs 11. The BSE 500 is up by 0.6%. The top gainers in the BSE 500 Index are IFCI (up 12.6%) and SYMPHONY (up 17.1%). The top losers are PRESTIGE ESTATES and TV TODAY NETWORK .
For the quarter ended December 2020, HDFC has posted a net profit of Rs 29 bn (down 65.1% YoY). Sales on the other hand came in at Rs 116 bn (down 42.2% YoY). Read on for a complete analysis of HDFC's quarterly results.
For the quarter ended September 2020, BAJAJ FINSERV has posted a net profit of Rs 16 bn (down 20.0% YoY). Sales on the other hand came in at Rs 150 bn (up 5.8% YoY). Read on for a complete analysis of BAJAJ FINSERV's quarterly results.
Monopolistic railway financer with impeccable asset quality.
Does the company having 70% market share of the mutual fund registrar business have sound prospects?
More Views on NewsLast time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.
In this video, I'll show you how to get started on the path to daily trading profits.
In this episode, ace trader Brijesh Bhatia talks to us about the best investments of 2021, his profitable trading system, and much more.
An Indian company founded three decades ago in a garage caught my attention...
More
Jagan
Aug 12, 2010Fine thinking and good analysis put into this article. kudos to the team!