AIIB, ADB and IFC may join India's credit enhancement SPV as partners

China-backed Asian Infrastructure Investment Bank (AIIB) along with international financial institutions Asian Development Bank (ADB) and International Finance Corporation (IFC) may join India's proposed credit enhancement corporation, the National Infrastructure Credit Enhancement Ltd or NICE as equity partners to support easier funding of infrastructure projects in India.

The Budget has proposed setting up of NICE as a dedicated credit enhancement NBFC that would bolster lower-rated bonds issued by companies in the sector. This is required to help infrastructure firms to mobilize funds at competitive rates and step up investments.

Infrastructure financing firm, India Infrastructure Finance Co. Ltd. (IIFCL) has been mandated to set up the entity.

Senior government officials said that AIIB, ADB and IFC may pick up to 10 per cent equity each in NICE to strengthen the proposed NBFC's prime role of upgrading the borrowings programme of infrastructure firms.

The terms of equity support is being discussed and would be finalised once the structure of the new corporation is put in place, the official added.

Manila-based international development finance institution ADB, Beijing headquartered AIIB and World Bank's private sector investment arm IFC are engaged in a big way in investing, funding and advising sustainable infrastructure projects across the globe.

It is believed that their presence in an Indian institutional entity would lend much needed support to stepping up infra investment. Moreover, projects vetted by NICE may also qualify for easier and long term financing from these institutions.

Apart from international institutions, the National Housing Bank and (NHB) and National Bank for Agriculture and Rural Development (Nabard) would also join NICE as equity partners with between 5-10 per stake.

India Infrastructure Finance Co. Ltd. (IIFCL) will be the main sponsor of the credit enhancement NBFC with about 22 per stake. Government has also pitched in to provide initial seed

Presenting her maiden Budget, Finance Minister Nirmala Sitharaman has said that a credit guarantee enhancement corporation for which regulations have been notified by the RBI, will be set up in 2019-20. first reported about government's plan to announce NBFC in this year's Budget.

The proposed NICE will set up a fund to attract infrastructure investments by insurance and pension funds to provide credit enhancement to infrastructure companies. However, its main job will be to act as a guarantor for lower-rated bonds issued by infrastructure companies. This would help these bonds to bolster their ratings.

As per RBI estimates, more than 85 per cent of corporate bond issuance in India is by borrowers with ratings of 'A' and above. The credit enhancement set up will help to bring even lower rated borrowers in the bond market.

The proposal on credit enhancement fund was first announced in the budget for fiscal year 2016-17 by then finance minister Arun Jaitley. But since then, the scheme has not taken off due to various regulatory hurdles.

The Centre had earlier mooted the idea of IIFCL and several state-owned institutions like LIC, State Bank of India and Bank of Baroda to come together to set up a dedicated credit enhancement company. But IRDA regulations prevented LIC to be part of the fund while banks could not participate due to rising NPAs and other commitments.

The government is looking to bolster infrastructure investment as it is key for boosting growth in the economy. It is estimated that India needs $ 4.5 trillion to be spent on infrastructure developments over the next 25 years.

But it is expected to garner a lot less. Innovative funding and financing schemes are being looked to bridge the deficit and allow the sector to grow at desired pace.

A(Subhash Narayan can be reached at subhash.n@.in)

( With inputs from IANS )