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.