SME Times News Bureau | 08 Aug, 2020
The government proposes to give the go-ahead for a new credit
enhancement non-banking finance company (NBFC) that will act as a guarantor for
lower-rated bonds issued by infrastructure companies to help them raise funds
at competitive rates.
A credit enhancement structure or a company helps in lifting the ratings of a
specific project or a Special Purpose Vehicle (SPV) executing that project,
making it easier for them to mobilise funds from the market at attractive
rates.
The need for credit enhancement has become acute during the Covid-19 pandemic
as infrastructure companies are under stress and need necessary support to
enhance the ratings of their projects and ensure adequate liquidity required
for fresh investments.
Government sources said that though the operation of a Credit Guarantee
Enhancement Corporation has been revised in view of similar operations being
currently offered by a few government agencies, a dedicated structure plan has
not been junked and the Centre will go ahead with a new NBFC after further
discussions and at an appropriate time.
It is expected that the credit enhancement structure would take shape as
planned earlier, wherein infrastructure financing firm India Infrastructure
Finance Co Ltd (IIFCL) in a joint venture with the National Housing Bank (NHB)
the and National Bank for Agriculture and Rural Development (Nabard) would set
up a SPV known as 'National Infrastructure Credit Enhancement Ltd' or NICE.
Last year, the government provided seed capital of Rs 500 crore to
operationalise the SPV but ever since the project has been delayed over further
reviews by an inter-ministerial committee.
Sources said now is the right time for the new entity to come into being as it
will help several infrastructure projects to take off which otherwise are stuck
due to liquidity issues.
In its 'Atmanirbhar Bharat' package, the government has already introduced a
100 per cent Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs to ensure
adequate liquidity to the segment hit hard by the Covid-19 outbreak. Also, a
partial guarantee for stressed MSMEs has been provided for.
However, infrastructure projects entailing large investments will gain a lot
from a dedicated credit enhancement entity. The SPV will ensure that the Rs 100
lakh crore investment required in infrastructure over the next five years
materialises.
Presenting her maiden Budget last year, Union Finance Minister Nirmala
Sitharaman had said that a credit guarantee enhancement corporation, for which
regulations have been notified by the RBI, will be set up in 2019-20. However,
it got delayed and may be considered this year.
As per the blueprint of the proposed corporation finalised by the government
earlier, the IIFCL will hold 22.5 per cent stake in the new NBFC while the NHB
and Nabard could pick up to a 10 per cent stake each.
The 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 the Reserve Bank of India 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 bring even lower-rated borrowers into the
bond market.
The proposal on the credit enhancement fund was first announced in the Budget
for 2016-17 fiscal by then Union 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 the Insurance Regulatory and Development Authority's regulations prevented
LIC from being part of the fund, while banks could not participate due to the
rising NPAs and other commitments.
The government is now looking to bolster infrastructure investment as it is the
key to boost economic growth. It is estimated that India needs to spend $4.5
trillion on infrastructure development over the next 25 years.
But a lot lesser amount is expected to be garnered by the government.
Innovative funding and financing schemes are thus being looked into to bridge
the deficit and allow the sector to grow at the desired pace.