Banks constrained to provide long-term funding as asset-liability mismatch is growing

To kick-start long-term infrastructure debt funding, the Finance Ministry is set to place the final operational structure of Infrastructure Debt Funds (IDFs), including underlying regulations, before the Cabinet this week, a senior Finance Ministry official told The Hindu.

The government estimates a requirement of $1 trillion for infrastructure sector funding in the next five years. Of this, the private sector, through public-private partnership projects, is expected to contribute 50 per cent. The urgency of the decision comes in the backdrop of banks – so far the main source of funding – reaching their exposure limit, with a growing asset-liability mismatch constraining them from providing long-term funding.

“We expect the operationalisation of IDFs to generate a huge inflow of foreign exchange from sovereign wealth funds and overseas debt funds, which is expected to further strengthen the rupee,” the official explained.

Consensus

The move comes after winning consensus among key stakeholders – potential sponsors, investors, borrowers and regulators RBI, SEBI and IRDA – following 18 months of detailed discussions. This process was essential to ensure that the enabling framework remains attractive for both foreign investors and infrastructure project owners.

The last meeting with all the stakeholders was held on September 27.

Industry sources close to the discussions told The Hindu that key to operationalising IDFs was the finalisation of a Model Tripartite Agreement between the concessionaire, private party and the IDF which strengthens the legal rights of the primary lenders and will be applicable for financing of all infrastructure projects.

Law Ministry consulted

According to the official, the Law Ministry was consulted on the Agreement based on the consensus emerging during the meeting with the stakeholders.

“It will be possible for interested sponsors to launch IDFs once SEBI notifies the procedures/guidelines for IDFs through mutual fund route and the government notifies the Model Tripartite Agreement for IDFs through the NBFC route. Both RBI and CBDT have already issued the enabling notifications”, the official confirmed.

“The government is using an array of measures to generate investment in IDFs. This phase is of managing the process and legal formalities in order to convert earlier policy decisions into operational reality,” said Chairman, Feedback Infrastructure, Vinayak Chatterjee.

‘Positive signal’

“Strengthening IDFs is a positive signal since it will create liquidity in the banking sector for funding of new infrastructure projects that are strapped for funds,” says Managing Director and CEO, L&T Infrastructure Finance Ltd., Suneet Maheshwari.

First proposal

The government had first proposed the setting up an India Infrastructure Debt Fund in 2009 to facilitate the long-term debt requirement of infrastructure projects with a view to creating an enabling framework for multiple market-driven IDFs rather than a government-sponsored fund.

In the last budget, the Finance Minister announced the setting up of special vehicles in the form of notified IDFs. To attract offshore funds, withholding tax on interest payments on borrowings by IDFs was reduced from 20 per cent to 5 per cent, while the income of IDFs was further exempted from income-tax.

The Finance Ministry eventually wants long-term funds from insurance and pension funds, sovereign wealth funds to be channelised through IDFs to supplement lending for infrastructure projects by mutual funds and NBFCs.

Besides providing longer term and lower cost funds, IDFs will create fresh headroom to take up a large number of new mission-critical infrastructure projects.

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