Real estate, infrastructure investment trusts could raise Rs 50K crore: ASSOCHAM-Crisil

“This amount can be utilised either for repayment of debt from banks/ non-banking financial companies (NBFCs)/financial institutions (FIs) or as a consideration to the existing sponsor for dilution of stake or both,” according to the study titled ‘Building a new India,’ conducted by ASSOCHAM jointly with global research firm Crisil.

“This will result in monetisation of sponsor’s investment in long gestation projects or result in release of loan funds for banks to fund other infrastructure projects,” the report said.

Both REITs and InvITs are vehicles created to primarily invest in revenue-generating real estate/infrastructure assets.

The ASSOCHAM-Crisil joint study also estimated that public sector banks need equity of Rs 1.7 lakh crore by March 2019, which is a tall order considering that banks have so far contributed to nearly half of the debt funding needed in the infrastructure space.

But, the study highlighted, a sharp fall in profitability has reduced capital generation from internal accrual of banks, while weak performance has diminished their ability to raise capital from external sources. And the capital needs can turn out to be higher if credit growth is stronger.

“These constraints would necessitate a large part of infrastructure needs to be met from the corporate bond market,” said the study.

Considering the banking sector’s core strengths – comfortable capitalisation, and adequate project appraisal and monitoring skills, over the past ten years, bank lending to the infrastructure sector has grown at a CAGR of 28 per cent, which is faster than the overall credit growth. Besides, the infrastructure’s share of bank credit has doubled from 7.5 per cent in 2005 to 15 per cent in 2016.

“This rapid growth in lending to the infrastructure sector poses the risk of asset-liability mismatches (ALM) given that infrastructure project loans have long tenures of 10-15 years, while bank deposits, the main source of funds, typically have a maturity of less than 3 years,” the study noted.

“Moreover, several banks are also nearing the group exposure limits set by RBI for lending to large infrastructure players,” it added.

The ASSOCHAM-Crisil study suggested that the ideal mode of financing infrastructure projects is for banks to focus on funding up to the pre-commissioning stage of projects.

“Given their strong project appraisal and monitoring skills, and healthy capitalisation, banks are well placed to take up financing in the pre-commissioning phase, when project risk is the highest,” it said.

After the project is commissioned and stable, banks must refinance the debt through bonds to long-term investors, as such refinancing will free up considerable funds for banks and enable their redeployment in new projects.

“While this financing model will allow banks to address their ALMs better, bond investors will also get good quality, long-term assets with stable cash flows,” said the study.

“Plus, developers can benefit from reduced costs and fixed rates of interest that can help offset the interest rate risks inherent in bank loans,” it added.

“For this to happen, the banks will, however, need to adopt a stronger risk-based pricing model for project loans. Banks can price their loans to reflect the evolving risk profile of projects,” further said the report.

The report also highlighted that credit enhancement would be the key to making corporate bonds attractive to investors.

“Direct bond market funding of infrastructure projects comes with certain investment risks, and investors typically are risk averse, therefore, there arises a need for credit-enhanced structures that can help improve the credit ratings and increase their attractiveness for investors,” it said.

Highlighting that while large investors such as pension funds, provident funds and insurance companies have large corpuses they are restricted by regulation to invest only in highly-rated debt, therefore there is a need to bridge the gap between the low risk appetite of institutional investors and relatively high credit risk profile of infrastructure projects.

The study further suggested to look at innovative channels like green bonds for financing government's ambitious target of having 160 gega watt (GW) of solar and wind capacity by 2022 with investments worth about Rs 8 lakh crore, more so as banking channel alone would not be able to support such huge requirements.

The study also highlighted the need to liberalise investment norms for PFs and insurance cos. and allow them greater flexibility in their investments in terms of scope, which will help channel more funds for the infrastructure sector.