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Infrastructure debt funds
Government had proposed to set-up infrastructure debt funds (IDF) to
broaden sources of long-term finances to infrastructure projects. These
funds may take the form of a mutual fund (IDF-MF) or NBFC (IDF-NBFC).
IDF-NBFCs could offer low cost refinancing to operative projects in publicprivate
partnership (PPP) hence, they will get tax concessions, lenient
exposure and risk-weight norms. While the format may take time to be
implemented, over 3-4 years IDFs may emerge as a key source of
refinancing and competition for banks and NBFC. On the positive side, IDF
will also help banks and NBFCs to (1) manage peaking exposure caps and
(2) focus on high yielding under-construction infra-projects.
IDF to bridge funding gap in financing of infrastructure
q The IDFs were proposed to bridge the funding gaps envisioned against the planned
investment in India’s infrastructure, especially as many banks and NBFCs were
reaching close to their borrower and sector exposure caps.
q Accordingly, the government had proposed that IDFs may be set either in the form
of a mutual fund or a non-bank finance company (NBFC).
q The targeted investors would primarily be domestic and off-shore institutional
investors, especially insurance and pension funds who have long term resources.
q Banks and financial institutions would only be allowed to invest as sponsors.
q To attract off-shore funds, the government lowered withholding tax on interest
payments by IDFs from 20% to 5% and exempted income of the fund from tax.
IDF-NBFC to refinance operative PPPs, IDF-MF have wider scope
q IDF-NBFCs are expected to provide refinancing to less risky infrastructure projects
and hence their scope has been restricted to refinance PPP projects after their
construction is complete and have successfully operated for at least one year.
q Additionally, there should be a tripartite agreement between the concessionaire and
the project authority for ensuring a compulsory buyout with termination payment.
q These would typically include projects in sectors like roads, ports, airports,
railways, metro-rail etc.
q Due to lower risks, IDF-NBFC will enjoy lenient exposure and risk-weight norms-
50% risk-weight on eligible assets of IDF-NBFC versus 100% for others.
q On the other hand, the IDF-MF structure is being proposed to fund all infrastructure
sectors, project-stages and project-types; but their scope of refinancing bank loans
may be restricted to operative infrastructure projects.
q As the IDF-NBFC will focus on less risky projects it may attract insurance and
pension funds; IDF-MF may attract investors that seek higher returns.
q Refer Figure 1 for details on the two structures; RBI shall announce detailed
guidelines for IDF-NBFC separately.
IDFs may gain scale in focus areas
q Over the longer-term the IDF model may gain scale, especially in the refinancing of
operative PPP projects.
q The competitiveness of IDFs, especially IDF-NBFC, will originate more from the tax
concessions and lenient risk-weights rather than ability to mobilise low cost funds.
q While cost of international borrowing is lower than domestic borrowings in India,
high cost of forex hedging (adds 300-400bps) makes the all-in cost of long-term
overseas and domestic borrowings almost comparable.
q Therefore, lower tax rate for IDF (0%) versus bank (~33%) and Infrastructure
Financing Companies (effectively ~25%) will be a key to the former making similar
ROA even at lower yields; lower risk weight will improve capital-efficiency.
q Banks and IDFC may face increased competition in segments like roads, highways,
ports etc; IDF may not focus much in power and telecom sector.
q On the positive side, IDF will also help banks and NBFC to (1) manage peaking
exposure caps and (2) focus on high yielding under-construction infra-projects
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infrastructure debt funds
Government had proposed to set-up infrastructure debt funds (IDF) to
broaden sources of long-term finances to infrastructure projects. These
funds may take the form of a mutual fund (IDF-MF) or NBFC (IDF-NBFC).
IDF-NBFCs could offer low cost refinancing to operative projects in publicprivate
partnership (PPP) hence, they will get tax concessions, lenient
exposure and risk-weight norms. While the format may take time to be
implemented, over 3-4 years IDFs may emerge as a key source of
refinancing and competition for banks and NBFC. On the positive side, IDF
will also help banks and NBFCs to (1) manage peaking exposure caps and
(2) focus on high yielding under-construction infra-projects.
IDF to bridge funding gap in financing of infrastructure
q The IDFs were proposed to bridge the funding gaps envisioned against the planned
investment in India’s infrastructure, especially as many banks and NBFCs were
reaching close to their borrower and sector exposure caps.
q Accordingly, the government had proposed that IDFs may be set either in the form
of a mutual fund or a non-bank finance company (NBFC).
q The targeted investors would primarily be domestic and off-shore institutional
investors, especially insurance and pension funds who have long term resources.
q Banks and financial institutions would only be allowed to invest as sponsors.
q To attract off-shore funds, the government lowered withholding tax on interest
payments by IDFs from 20% to 5% and exempted income of the fund from tax.
IDF-NBFC to refinance operative PPPs, IDF-MF have wider scope
q IDF-NBFCs are expected to provide refinancing to less risky infrastructure projects
and hence their scope has been restricted to refinance PPP projects after their
construction is complete and have successfully operated for at least one year.
q Additionally, there should be a tripartite agreement between the concessionaire and
the project authority for ensuring a compulsory buyout with termination payment.
q These would typically include projects in sectors like roads, ports, airports,
railways, metro-rail etc.
q Due to lower risks, IDF-NBFC will enjoy lenient exposure and risk-weight norms-
50% risk-weight on eligible assets of IDF-NBFC versus 100% for others.
q On the other hand, the IDF-MF structure is being proposed to fund all infrastructure
sectors, project-stages and project-types; but their scope of refinancing bank loans
may be restricted to operative infrastructure projects.
q As the IDF-NBFC will focus on less risky projects it may attract insurance and
pension funds; IDF-MF may attract investors that seek higher returns.
q Refer Figure 1 for details on the two structures; RBI shall announce detailed
guidelines for IDF-NBFC separately.
IDFs may gain scale in focus areas
q Over the longer-term the IDF model may gain scale, especially in the refinancing of
operative PPP projects.
q The competitiveness of IDFs, especially IDF-NBFC, will originate more from the tax
concessions and lenient risk-weights rather than ability to mobilise low cost funds.
q While cost of international borrowing is lower than domestic borrowings in India,
high cost of forex hedging (adds 300-400bps) makes the all-in cost of long-term
overseas and domestic borrowings almost comparable.
q Therefore, lower tax rate for IDF (0%) versus bank (~33%) and Infrastructure
Financing Companies (effectively ~25%) will be a key to the former making similar
ROA even at lower yields; lower risk weight will improve capital-efficiency.
q Banks and IDFC may face increased competition in segments like roads, highways,
ports etc; IDF may not focus much in power and telecom sector.
q On the positive side, IDF will also help banks and NBFC to (1) manage peaking
exposure caps and (2) focus on high yielding under-construction infra-projects
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