DFI alone not panacea for infra finance issues: Sebi member Barua

Markets regulator Sebi's whole-time director Ananta Barua on Wednesday said the re-introduction of the development finance institution (DFI) alone will not end the infrastructure sector's woes with regard to financing.

The DFI needs to be supplemented by the existing vehicles of project finance, and banks and dedicated non-banking financial companies (NBFCs) will have to take the lead in funding greenfield (new) infrastructure projects, Barua said while speaking at an event organised by industry lobby Ficci.

He also rued that banks are accessing capital markets only for their core or Tier-II capital requirements, and need to access the markets more for raising resources for project finance.

In the Budget FY22, the government announced the creation of a DFI with a seed capital of Rs 20,000 crore for funding the Rs 111-lakh crore national infrastructure pipeline. This will be the second coming of a dedicated DFI after earlier ventures like ICICI and IDBI converted itself into banks.

"DFI alone will not resolve all the infrastructure financing issues.

"It needs to be supplemented by the existing structure of project financing through banks or focused NBFCs in the nascent stages. Then, there needs to be a refinancing or other capital market instruments to take over finance from those who have led in the initial stages through InvIT or securitisations," Barua said.

InvIT stands for infrastructure investment trust.

Stating that investors are wary of betting on greenfield projects, he said banks and dedicated NBFCs remain the ideal backers to fund greenfield infra projects initially, and then get it refinanced from capital market instruments.

Barua wondered that despite the retail focus in deposits where half of the parked money goes away every year, Indian banks do not avail of capital market instruments for raising long-term finance resources required for infrastructure like asset-backed securitisation and medium-term notes, which are used by their peers globally.

"Indian banks rely on capital markets purely to meet capital requirement of tier-I and tier-II. Therefore, time has come that they should tap capital markets for also funding project finance," he said.

The Reserve Bank of India's (RBI) partial credit enhancement (PCE) scheme for upping the credit rating of projects through bank backing has also not been successful because of some conditions that have been laid down, and the central bank needs to revisit the same, he said.

He specified that capping PCE exposure limit from the banking system to 50 per cent of the bond issue size, with a limit up to 20 per cent of the bond issue size for an individual bank is an impediment for the system.

Barua said most of the projects rated 'BBB-' can get a post-enhancement rating in the 'A' category, which is low compared to 'AA+' rating expected by insurance companies and PFs (provident fund) segment.

"Given the requirement to undertake assessments and the 20 per cent cap on CE for individual banks, it would need at least three banks to provide 50 pc credit enhancement.

"It has been difficult to arrange three banks willing to provide CEs on a single project. Hence, there is a need to revisit this cap," he said.

Meanwhile, Barua welcomed the activity on the InvITs front, and said that over Rs 68,000 crore has been mobilised by asset owners from the route and overall, assets under managements for the instrument stand at Rs 2.81 lakh crore.

Powergrid Corporation has raised Rs 7,000 crore and the National Highway Authority of India will soon raise Rs 7,000 crore by offering parts of operational road assets to investors, he said adding that Sebi has given the go-ahead for the NHAI issue.

He, however, stressed that there is a need to replicate the InvIT successes in other infrastructure sectors like ports, trade corridors, metro rails, oil pipelines, power transmission and renewable energy projects.