Centre planning new NBFC to ease credit for infrastructure projects
The Indian government is looking into creating a new non-banking financial company (NBFC) to make it easier for infrastructure projects to get credit financing. This NBFC would guarantee lower-rated infrastructure bonds, boosting project ratings and credit risk profiles, and allowing companies to obtain funding on better terms. The plan for this institution could be revealed in the upcoming budget, with specifics ironed out in the next fiscal year (FY25).
NBFC to enhance credit risk profile and long-term investments
Sanjay Agarwal, Senior Director at Care Ratings Ltd, explained the merits of an NBFC offering guarantees to enhance credit risk profile of infrastructure firms. He said this would help projects started by states and even at district levels, which often face funding problems due to many reasons. He noted that while projects like roads and renewables are well-financed, some state government projects, particularly last-mile schemes, need financing. This institution would allow more long-term funds to be invested in the sector.
What about previous plans?
Finance Minister Nirmala Sitharaman proposed setting up an NBFC for infrastructure financing in the 2019-20 budget. However, it was delayed due to disagreements between different government departments during inter-ministerial consultations. An earlier idea involved establishing a National Infrastructure Credit Enhancement Ltd or Credit Guarantee Enhancement Corporation, with an initial capital of Rs. 20,000 crore and equity participation by other state-run financial institutions. The necessity for credit enhancement has become important after the pandemic, which put many infrastructure companies under stress.
Addressing challenges with credit enhancement
A credit enhancement structure would tackle the infrastructure sector's challenges by offering easy access to liquidity for new investments. The current credit guarantee mechanism is limited to entities like the India Infrastructure Finance Co. Ltd (IIFCL) that have delivered only about Rs. 250-300 crore yearly over the last six to seven years. In this context, a dedicated entity offering a single window credit guarantee option to infrastructure projects partnering with multilateral agencies, would significantly support the sector.
