Infrastructure finance:

Industry information
November 2017
Underlying asset dynamics

Institutionally assisted project investments grew significantly in 2015-16

Project investments in the infrastructure space, assisted by financial institutions (FI) and banks, rose to a six-year
high at Rs 1.1 trillion in 2016-17. Banks and FIs directly involved in project finance reported sanctioning financial
assistance for 547 projects, of which 207 are in the infrastructure space. The roads and bridges sector saw the
maximum increase in institutionally assisted project investments, to Rs 132 billion from Rs 67 billion. The share of
the power sector, however, shrank from 78% to 73%.

Institutionally assisted infrastructure project in vestments (cost in year of sanction)

2500
(Rs bn)
2007 2015
2000

1500 1400

1132
1005
1000 896 908 906

661
507
445 426
500

0
2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

Source: RBI

Number of projects assisted by banks and FIs

200 2015-16 2016-17
180 173

160
140
120
100 93

80
60
40
17
20 8 4 6 7
1 1 3 1 2
0
Power Telecom Ports and Airports Storage and SEZ, Industrial, Roads & Bridges
Water Biotech and IT
Management park

Source: RBI

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Share of different infrastructure segments in assisted projects by banks and FIs
90%
78% 2015-16 2016-17
80% 73%
70%

60%

50%

40%

30%

20%
9% 10% 12%
10% 6% 5% 6%
0.4% 0% 1% 1%
0%
Power Telecom Ports and Airports Storage and Water SEZ, Industrial, Roads & Bridges
Management Biotech and IT park

Note: Share of sub-sectors is calculated on total investments in infrastructure sector only

Source: RBI

Regulatory framework

Overview of NBFCs

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956, and is engaged
in business of loans and advances; acquisition of shares/stock/bonds/debentures/securities issued by government
or local authority or other securities of marketable nature; leasing; hire-purchase; insurance business; and chit
business. An NBFC does not denote any institution whose principal business is agricultural or industrial activity or
sale/purchase/construction of immovable property.

NBFCs have been classified based mainly on two parameters:

1) The liabilities they access, i.e., deposit- and non-deposit accepting. Non-deposit-taking NBFCs are further
categorised by their size into systemically important (NBFC-ND-SI) and other non-deposit-holding companies (NBFC-
ND).

2) The activity they conduct

The different types of NBFCs are as follows:

1. Asset financing company (AFC)

2. Investment company (IC)
3. Loan company (LC)
4. Infrastructure finance company (IFC)
5. Systemically important core investment company (CIC-ND-SI)
6. Infrastructure debt fund (IDF)
7. Micro-finance institution (NBFC-MFI)
8. Factors (NBFC-Factors)

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Evolution of infrastructure finance NBFCs

Before December 2006, NBFCs were classified (on the basis of their type of business) into equipment leasing, hire
purchase, investment companies, and loan companies. In December 2006, their classification was revised.
Equipment-leasing and hire-purchasing NBFCs were clubbed and classified as asset-financing companies.

Earlier classification New classification Principal business

Equipment leasing Financing of physical assets supporting productive/ economic activity such as
automobiles, tractors, lathe machines, generator sets, earth-moving and
Asset finance company material-handling equipment moving on own power, and general purpose
Hire purchase industrial machines. These assets and income from the same had to be
greater than 60% of total assets and other income respectively.
Investment company Investment company Acquisition of securities.
Providing loans and advances for businesses other than its own and real
Loan company Loan company
physical assets.
Infrastructure company Infrastructure NBFCs Financing infrastructure projects.

In February 2010, the Reserve Bank of India (RBI) added infrastructure finance companies (IFC) to the NBFC
category. An IFC is defined as a non-deposit-taking NBFC that fulfills the following criteria:

I. Minimum 75% of its total assets to be deployed in infrastructure loans

II. Net owned funds of Rs 300 crore or higher
III. Minimum credit rating of A or equivalent
IV. Capital to risk (weighted) assets ratio (CRAR) of 15% with minimum 10% Tier-I capital

Regulatory framework for infrastructure finance companies

The following regulations are presently applicable to non-deposit-taking NBFCs. These regulations also apply to
infrastructure-financing NBFCs.

i) Loan classification

Credit facility extended by the NBFCs to borrowers for exposure in the following infrastructure sub-sectors will be
treated as infrastructure loans.

Sr.No Category Infrastructure sub-sectors

Roads and bridges
Ports
Inland waterways
1 Transport
Airport
Railway track, tunnels, viaducts, bridges
Urban public transport

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 Sr.No Category Infrastructure sub-sectors
Electricity generation
Electricity transmission
Electricity distribution
2 Energy
Oil pipelines
Oil / gas / Liquefied natural gas storage facility
Gas pipelines
Solid waste management
Water supply pipelines
Water treatment pipelines
3 Water and sanitation
Sewage collection, treatment and disposal system
Irrigation
Storm water drainage system
Telecommunication
4 Communication
Telecommunication towers
Education institutions (capital)
Hospital (capital)
Three-star or higher-category hotel located outside cities
Common infrastructure for industrial park, SEZ, tourism. Etc.
5 Social & commercial infrastructure Fertiliser (capital)
Post-harvest storage infrastructure for agriculture
Terminal markets
Soil testing laboratories
Cold chain

ii) Capital adequacy requirements

NBFCs are required to have a capital-to-risk weighted ratio of 15% with Tier I capital of 10% as of March 2017.

iii) Asset classification

Infrastructure finance companies shall, after taking into account the degree of well-defined credit weaknesses and
extent of dependence on collateral security for realisation, classify their loans and advances and other forms of credit
into:

1 Standard assets
2 Sub-standard assets
3 Doubtful assets
4 Loss assets

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iv) Provisioning requirements

The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D has increased to 0.40%. Compliance to the
revised norm will be phased:

 0.30% by end of March 2016

 0.35% by end of March 2017

 0.40% by end of March 2018

Provisioning norms for loans and advances

Type of asset Period for which loans and advances are overdue Provision % of outstanding

Sub-standard Up to 12 months 10

Doubtful (secured) Up to 12 months 20

Doubtful (secured) 12 to 36 months 30

Doubtful (secured) More than 36 months 50

Doubtful (unsecured) Not applicable 100

Loss Decided by company 100

Source: RBI, CRISIL Research

v) Concentration of credit

According to RBI guidelines, a non-deposit-taking, systematically important NBFC should not lend amounts
exceeding 15% of its net owned funds to any single borrower and exceeding 25% to any single group of borrowers.
However, an infrastructure finance company may exceed the norms by 5% of its net owned funds for a single
borrower and 10% for a group of borrowers.

vi) External commercial borrowings (ECB)

NBFC-IFCs are permitted to avail of ECBs for lending to infrastructure sector under the automatic route. These
NBFCs can avail of ECBs up to 75% of their net owned funds through the automatic route and must hedge 75% of
their currency risk exposure. The ceiling on the rate of interest for such borrowings is 450 basis points over six months
LIBOR (London inter-bank offer rate) for average maturity periods of three to five years and 500 basis points for
maturity periods exceeding five years.

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Infrastructure debt fund (IDF)
Providing an additional funding source for infrastructure projects, infrastructure debt funds (IDFs) have tapped private
capital pools over the past three years. IDFs essentially act as vehicles for refinancing the existing debt of
infrastructure companies, thereby creating headroom for banks to lend to fresh infrastructure projects. IDFs are
investment vehicles which can be sponsored by commercial banks and NBFCs in India in which domestic/offshore
institutional investors, especially insurance and pension funds, can invest through units and bonds issued by IDFs.
An IDF can be set up either as a trust or a company. A trust-based IDF would normally be a mutual fund regulated
by the Securities and Exchange Board of India and can be sponsored by banks and NBFCs, whereas a company-
based IDF would normally be an RBI-regulated NBFC. Only banks and infrastructure finance companies can sponsor
IDF-NBFCs. Till date more than Rs 90 billion has been raised through IDF-NBFC and approximately Rs 20 billion
raised through IDF-MF route.

One of the key advantages of IDF-NBFCs that have helped draw investors is they are allowed to invest only in
infrastructure projects that have successfully completed one year of commercial production. Hence, there is no risk
of failure to complete projects.

An NBFC-IFC will need to meet the following conditions for sponsoring an IDF-NBFC:

• Sponsor IFCs would be allowed to contribute maximum 49% to the equity of the IDF-NBFCs with a minimum
equity holding of 30% of the equity of IDF-NBFCs.
• Post investment in the IDF-NBFC, the sponsor NBFC-IFC must maintain minimum CRAR and net owned fund
(NOF) prescribed for IFCs.
• There are no supervisory concerns with respect to IFCs.

5/25 scheme

The RBI has, in a notification on July 15, 2015 allowed loans to infrastructure project financing to be split in a 5/25
scheme – where the viability of the project may be long (say 25 years) and therefore, amortisation of the debt may
also take 25 years. Until now, banks were typically not lending beyond 10-12 years. As a result, cash flows of
infrastructure firms were stretched as they tried to meet shorter repayment schedules.

 Since banks cannot engage in borrowing for a 25-year term, to finance this, they would like to divide an
infrastructure project into smaller chunks – of say five years. This is with the hope that after that term, there will
be a “bullet” repayment of the loan through takeout financing by other banks.

 The RBI has allowed this kind of lending without calling the takeout financing a restructuring proposal if the loan
is “standard,” i.e., it’s not an NPA. The option will also be available for projects that have already been classified
as bad debt or stressed, but it will be treated as “restructuring”. The project will continue to be termed non-
performing till the project gets upgraded after satisfactory performance on loan servicing.

 Only term loans to projects, in which the aggregate exposure of all institutional lenders exceeds Rs 500 crore will
qualify for such flexible structuring and refinancing.
The infrastructure guidelines encourage banks to flexibly structure long-term loans for infrastructure (core industry)
projects, which will help them absorb potential adverse contingencies, also known as the 5/25 structure. The RBI has
also clarified that refinancing of such long-term project loans will not be construed as restructuring, if the following
conditions are met:

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 Tenor of the amortisation schedule should not exceed 80% of the initial concession period for infrastructure
projects being implemented under the public-private partnership (PPP) model; or exceed 80% of the initial
economic life envisaged at the time of project appraisal (for determining user charges / tariffs) in case of non-
PPP infrastructure projects; or 80% of the initial economic life envisaged at the time of project appraisal (by a
bank-appointed independent engineer) in case of other core industry projects.

 The amortisation schedule may be modified after date of commencement of commercial operations (DCCO),
based on the actual performance of the project (in comparison with assumptions made during financial closure)
without such modification being treated as restructured, if:

 The loan is a standard loan as on the date of change of amortisation schedule; net present value of the loan
remains the same before and after change in the schedule; and the entire outstanding debt amortisation is
scheduled within 85% of the economic life-span of the project.s

Ujwal Discom Assurance Yojana (UDAY)

Despite implementation of the financial restructuring package (FRP) in 2012-13, outstanding debt shot up to Rs 4.3
trillion as in March 2015 from Rs 2.4 trillion in March 2012. To address these issues, the Union Cabinet approved a
new scheme - Ujwal Discom Assurance Yojna (UDAY) - that aims to improve the financial health of discoms through
initiatives such as reduction in interest cost, reduction of cost of power, and improvement in operational efficiencies.
Under the scheme, 75% of the debt of state discoms up to September 30, 2015 will be transferred to respective state
governments. States have issued UDAY bonds worth Rs 2.32 trillion covering 86% of the debt (to be taken over by
them) under the UDAY scheme as of June 2017. With the issuance of UDAY bonds, the financial liquidity of discoms
has improved owing to reduced interest burden after transfer of debt to the respective state governments. As per the
latest notification, for the government-owned NBFCs, the entire discom debt eligible under UDAY will be converted
into UDAY bonds and simultaneously into cash by selling those bonds in the market. CRISIL Research believes the
UDAY scheme is a mixed bag for the financial sector. Public sector banks, which have significant exposure to
discoms, will have to bear loss in interest income since they would now earn lower yield of about 8-9% on state
government bonds instead of 12-13% that they charged discoms; NBFCs will also feel pressure on their overall
profitability.

Key growth drivers

Focus on infrastructure by the government and consistent efforts for ease of doing of
business

The government’s continuing focus on infrastructure has been one of the major success factors for infrastructure
finance companies over the years. As per the Twelfth Five-Year Plan (2012-13 to 2016-17), investments in the
infrastructure sector were expected to be around Rs 30 trillion. The limited fiscal legroom available with the
government to increase budgetary allocations to this sector and ceilings on bank lending to this sector imply huge
opportunities for NBFCs in the infrastructure financing space.

The government has also launched various schemes in past year which may help in the growth and betterment of
different infrastructure sectors. Some of these schemes are:

 Smart Cities Mission

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 Bharatmala and Sagarmala project

 Atal Mission for Rejuvenation and Urban Transformation (AMRUT)

 Power for All

 Ujwal Discom Assurance Yojana (UDAY)

Introduction of tax-free bonds

Given the long-term nature of infrastructure projects and their importance to the economy, these projects have been
funded primarily by government through budgetary allocations. Apart from government, banks and NBFCs have been
other large financiers, meeting over a third of the sector’s funding needs. NBFCs typically depend on market
borrowings, particularly the bond market, to meet their funding requirements, with bond issuances accounting for
over three-fourths of their funding mix. Introduction of tax-free bonds by the government has made it easier for these
companies to raise funds from the market in recent years.

Key risks

Project-related risks

Infrastructure projects are complex, capital-intensive, and have long gestation periods that involve multiple and often
unique risks for project financiers. Hence, NBFCs with exposure in the infrastructure space need strong project
appraisal teams to be successful.

Extent of competition

NBFCs face strong competition from banks that have access to low-cost funds through current account and savings
account deposits, which NBFCs lack. However, with many banks reaching their internal limits for various
infrastructure segments and their capital for high growth being scarce, they would pose lower competition to NBFCs
in the near term.

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