Infrastructure Sector Current Affairs
Reserve Bank of India (RBI) has liberalised norms governing external commercial borrowings (ECBs) for infrastructure creation. The provisions have been reviewed and decision has been taken in consultation with Central Government.
RBI has reduced minimum average maturity required for the ECBs in the infrastructure space raised by eligible borrowers to three years from earlier five years. Additionally, it also has reduced average maturity requirement for mandatory hedging to five years from earlier ten years.
The move comes amid concerns surrounding availability of funds following liquidity squeeze and the difficulties being faced by non-bank lenders, especially those facing asset liability issues due to heavy reliance on short-term funding for long-term assets. This, along with defaults by infra lender IL&FS, has hurt credit markets especially infrastructure financing sector. Central Government has been unequivocal in suggesting remedial measures which will address needs of the economy. It had suggested to include special window for NBFCs, but RBI is not undertaking measures. However, relaxations in ECB norms follow other moves by RBI, including earlier it permission to banks to use credit enhancement to help NBFCs raise medium to long-term funds.
Union Government is going to launch Rs.500 crore Credit Enhancement Fund (CEF) in July 2018 to facilitate infrastructure investments by insurance and pension funds.
The CEF provides additional source of assaurance or gaurantee that borrower will service their loan. It also helps borrower to raise loans at lower interest rates. The fund was first announced in Union Budget for fiscal year 2016-17.
Credit Enhancement Fund (CEF)
CEF will provide credit enhancement for infrastructure projects which will help in upgrading credit ratings of bonds issued by infrastructure companies and facilitate investment from investors like pension and insurance funds.
The initial corpus of the fund will be Rs 500 crore and will be sponsored by IIFCL (India Infrastructure Finance Company). It will operate as a non-banking finance company (NBFC). IIFCL will hold 22.5% stake in the NBFC, while Asian Infrastructure Investment Bank (AIIB) has been offered by the Government to pick up 10% stake.
At present, only $110 billion is being invested in infrastructure in India, against requirement of $200 billion, leading many analysts to classify India as infrastructure deficit country. Most of the present infrastructure project financing is done by banking system. But all these lenders are saddled with problem of non-performing assets (NPAs). So there is need for the private sector to be more active on the infrastructure investment front. CEF will serve as alternative for rising of money for infrastructure projects through corporate bonds.