BY

PROF.SUJIR PRABHAKAR

CHAPTER: 2
SOURCE OF FUNDS
INTRODUCTION

 Project finance is used for funding large and

complex infrastructure assets.
 Requires long term source of funds.
 In India long term source of funds are limited
for high upfront investment, long gestation
period and back end returns.
 Pension and insurance funds are ideally
suited.
INTRODUCTION

 Pension and insurance funds do not look in to

investments with high credit risk.
 In India bond markets lacking depth.
 It is bank finance more particularly project
finance bank loans that fund assets in India.
 Source of funds are classified in to two
categories- Debt domestic and external and
Equity domestic and external.
SOURCESOF FUNDS

 Debt domestic is raised from domestic

commercial banks, domestic term lending
institutions, domestic bond markets.
 Debt external is raised from international
commercial banks, export credit agencies and
multilateral agencies.
 Equity is raised from domestic developers,
public utilities /government.
SOURCES OF FUNDS

 Equity overseas is raised from project leasing

multilateral agencies.
 Various modes of government funding like
viability gap funding are available to PPP
projects.
 If private sector is involved, it has to raise
long term funds from the market.
 Commercial banks are the largest source of
funds for project finance.
SOURCES OF FUNDS

 Private Finance Initiative (PFI) is a way

funding public infrastructure projects with
private capital and expertise.
 Lending to long gestation infrastructure
project results in asset- liability mismatch for
banks.
 Take out financing is one of the methods to
mitigate liquidity risk in banks.
DOMESTIC COMMERCIAL BANKS

 Take out financing is a method of providing

finance for a longer duration.
 The loans are extended with an
understanding that they will be taken out of
books of financing bank with in pre fixed
period by another institution which has
access to long term funds.
 This prevents asset-liability mismatch in
banks.
NON BANKING FINANCE COMPANIES

 NBFCs play a major role in project financing.

 Developed over a period deep sectoral focus
with knowledge of business and complexities.
 They have better credit appraisal and risk
management. They have a higher risk
appetite for long term gestation projects.
 They have organization flexibility, with quick
turn around and better response time and
tailor made services.
NON BANKING FINANCE COMPANIES

 Three categories of NBFCs – asset finance

companies, loan finance companies and
investment companies.
 RBI has given permission for setting up
infrastructure finance companies.
 Two major NBFCs like Power Finance
Corporation and Rural Electrification
Commission together constitute 80% of
lending by the NBFCs.
INDUSTRIAL FINACE COMPANIES

 RBI has given permission to set up

infrastructure finance corporation.
 All criteria applicable to NBFCs are applicable
to IFCs.
 A minimum of 75% of IFCs assets need to be
deployed for infrastructure and their net
owned funds should be Rs 3 billions and
above.
IFCs

 IFCs should carry a minimum rating of A from

CRISIL or equivalent rating from other rating
agencies.
 The minimum tier I capital should be 10%
 The major source of funds is from commercial
banks.
 RBI has mandated that a bank’s exposure to
IFCs should not exceed 15% of banks capital
funds with a provision to increase to 20%.
NBFCs

 Type of funding given by NBFCs:

1. Loan for development stage – includes
financial assets/rights/approvals, meets
initial expenses and unlock funds blocked in
assets/rights.
2. Bridge cum project loan – bridge financing
for projects before financial closure or
project loan draw down. It is used to kick
start a project.
NBFCs

 Revolving Loan – it is a medium term facility

to align cash flow mismatches across
projects.
 It offers flexibility of end use as unsecured
loans in project SPVs.
INSURANCE AND PENSION FUNDS:
1. Life insurance companies are required to
invest 15% of their life fund in infrastructure
and housing.
INSURANCE AND PENSION FUNDS

 IRDA has set stringent guidelines for

investment in infrastructure bonds- rating
should not be less than AA.
 Non recourse infrastructure projects are rated
not higher than BB. So it is a big challenge.
 The Pension Fund Regulatory Development
Agencies (PFRDA) guidelines permit75% of the
investment in investment grade rating from a
rating agency with a sectoral cap of 75% of the
investment.
ECBs

 RBI’s 3 track policy on ECBs :

 Track I-foreign exchange loans with a
minimum maturity period of 3 to 5 years.
 Track II-long term borrowing of minimum 10
year maturity.
 Track III-rupee denominated bonds masala
bonds for off-shore investors.
 NBFCs are allowed to borrow under Track III.
INFRASTRUCTURE DEVELOPMENT FINANCE
COMPANY LTD

 IDFC LTD provides finance for infrastructure

projects including ownership of infrastructure
assets.
 Provide advisor services, asset management
services and investment banking.
 It was incorporated on 30th January,1997 as a
public limited company.
 Initially registered as NBFC, later on as a public
financial institution, a merchant banker and a
debenture trustee under SEBI.
 IIFCL AND TAKE OUT FINANCE SCHEME

 SCBs extend loans under the common loan

agreement to the borrowers.
 Under tripartite agreement in the beginning a
schedule of occurrence of take out is decided.
 In conditional take out, the take out institution
will take the assets in their books thus freeing
the balance sheet of the bank.
 Now more and more SCBs have this
arrangements to over come liquidity mismatch.
BOND MARKET

 Bond market in India has not fully developed.

 Government bond market is very active in
India.
 The corporate bond market in India continues
in OTC market in which large banks and
mutual funds are the main players.
 The retail investment in the corporate bond
market is negligible.
BOND MARKET-INFRASTRUCTURE DEVELOPMENT FUND

 GOI has notified “infrastructure debt

fund”(IDF) to channel long term debt finance
in infrastructure sector.
 IDF is an investment vehicle that can be
sponsored by SCBs and NBFCs in India.
 Domestic and offshore investors specially
insurance and pension funds can invest
through units and bonds issued by IDF.
BOND MARKET-INFRASTRUCTURE DEVELOPMENTFUND

 IDF can be set up as a trust or a company.

 IDF-NBFCs can cover loans extended to PPP
infrastructure projects.
 To make bond market vibrant following
suggestions can be contemplated:
 A simplified low stamp duty structure.
 A “credit default swap” an important hedging tool
can be introduced.
 This is an insurance against credit risk.
MULTILATERAL AGENCIES

 IMF,IBRD, International Finance Corporation

(IFC),Multilateral Investment Guarantee
Agency (MIGA) are multilateral agencies
funding infrastructure projects directly
funding Government and private enterprises.
 IFC , as affiliate of World Bank, is a separate
entity to promote growth of the private
sector which contributes to the economic
development of its member countries.
INTERNATIONAL FINANCE CORPORATION

 IFC’s commitment are concentrated to

infrastructure, manufacturing, financial
markets, agribusiness and renewable energy.
 IFC has scaled up its presence in India in Low
Income States and NE states.
 IFC’s advisory services covers a) promoting
investment in private sector b) financial
inclusion c) renewable energy d)agro business
and e) developing PPP transactions with focus
on health and education.
ASIAN DEVELOPMENT BANK

 ADB’s new focus areas in India are a) financial

inclusion and generation of sustainable
livelihood, b) skill development and
integrated water resources c)coastal zone
management and flood control,
d)agribusiness e) infrastructure development
and f) tourism
 NEW DEVELOPMENT BANK: Promoted by
BRICS. Mandate of the bank is to finance
infrastructure projects in member countries.
ASIAN INFRASTRUCTURE INVESTMENT BANK

 Just like new development bank this bank

also concentrates on Infrastructure
development.
 The bank opened in the year 2015 in Beijing.
 It has the membership of 57 share holding
countries with an authorized capital of
USD100 billion.
 China is the largest share holder with over
30% followed by India at 8% and Russia.
OTHER FUNDING POSSIBILITIES

 Securitization of infrastructure portfolio to

increase the liquidity with financing
institutions.
 NHAI’s securitization model-to address the
risk of toll collections. To allow flexibility in
refinancing loans for NHAI, securitization or
additional lending up to 30% of the cost of
original project was allowed.
OTHER FUNDING POSSIBILITIES

 NHAI in the interest of the public decided to

expropriate the project to relieve the credit
risk on banks.
 SEBI has introduced SEBI(REITs) Regulations
2014 and SEBI(In VITs) Regulations 2014 to
encourage development of i) real estate ii)
rental income iii) infrastructure.
 Foreign investors are permitted to invest in
real estate assets under these regulations.
NATIONAL BANK FOR FINANCING
INFRASTRUCTURE AND DEVELOPMENT(NaFID)

 The National Bank for Financing Infrastructure

and Development Bill, 2021 was introduced in
Lok Sabha on March 22, 2021.
 The bill has become an act after presidential
consent given on 28th March, 2021.
 The Act establishes the National Bank for
Financing Infrastructure and Development
(NBFID) as the principal development financial
institution (DFIs) for infrastructure financing.
NEED FOR THIS ACT

 India needs to invest heavily in infrastructure.

Infrastructure funds require long-term non-
recourse funds, which have inherent risks due
to higher borrowing costs, delays, and higher
risks of project failure.
 Though banks rely heavily on short-term
liabilities, infrastructure financing is
essentially long-term financing.
NEED FOR THIS ACT

 Long-term infrastructure financing exposure

has always been the main factor leading to
mismatches in bank balance sheets, causing
systemic concerns.
 On the other hand, the Indian corporate bond
market is not deep and mature enough to
meet India’s infrastructure financing needs.
NEED FOR THIS ACT

 To promote sustainable economic development,

facilitate the inflow of low-cost, long-term
capital (mainly debt) from India or abroad.
 To ensure the establishment of a national
infrastructure finance bank and development as
the most important financial institution.
 Initially, this institution is wholly owned by the
central government to build confidence in its
stability and sustainability and to obtain
resources at competitive prices.
PURPOSE OF NBFID

 DFIs are set up for providing long-term finance

for such segments of the economy where the
risks involved are beyond the acceptable limits of
commercial banks and other ordinary financial
institutions.
 Unlike banks, DFIs do not accept deposits from
people.
 They source funds from the market, government,
as well as multi-lateral institutions, and are often
supported through government guarantees.
CAPITAL FORMATION

 NBFID will be set up as a corporate body with

authorized share capital of one lakh crore
rupees.
 DFI was established with a capital base of Rs.
20,000 crores and lending target of Rs. 5 lakh
crore in three years.
 Initially, the central government will own
100% shares of the institution which may
subsequently be reduced up to 26%.
SOURCE OF CAPITAL

 Shares of NBFID may be held by: (i) central

government, (ii) multilateral institutions, (iii)
sovereign wealth funds, (iv) pension funds, (v)
insurers, (vi) financial institutions, (vii) banks,
and (viii) any other institution prescribed by
the central government.
OBJECTIVES

 NBFID will have both financial as well as

developmental objectives.
 Financial objectives will be to directly or
indirectly lend, invest, or attract investments
for infrastructure projects located entirely or
partly in India.
 Central government will prescribe the sectors
to be covered under the infrastructure
domain.
OBJECTIVES

 Developmental objectives include facilitating the

development of the market for bonds, loans, and
derivatives for infrastructure financing.
 FUNCTIONS:
 (i) extending loans and advances for infrastructure
projects
 (ii) taking over or refinancing such existing loans
 (iii) attracting investment from private sector investors
and institutional investors for infrastructure projects.

FUNCTIONS

 (iv) organizing and facilitating foreign

participation in infrastructure projects
 (v) facilitating negotiations with various
government authorities for dispute resolution
in the field of infrastructure financing
 (vi) providing consultancy services in
infrastructure financing.
SOURCE OF FUNDS

 NBFID may raise money in the form of loans

or otherwise both in Indian rupees and
foreign currencies, or secure money by the
issue and sale of various financial instruments
including bonds and debentures.
 NBFID may borrow money from: (i) central
government, (ii) Reserve Bank of India (RBI),
(iii) scheduled commercial banks, (iii) mutual
funds, and (iv) multilateral institutions such as
World Bank and Asian Development Bank.
MANAGEMENT

 BFID will be governed by a Board of Directors. The

members of the Board include: (i) the Chairperson
appointed by the central government in
consultation with RBI
 (ii) a Managing Director,
 (iii) up to three Deputy Managing Directors
 (iv) two directors nominated by the central
government
 (v) up to three directors elected by shareholders
 (vi) a few independent directors (as specified).
MANAGEMENT

 A body constituted by the central

government will recommend candidates for
the post of the Managing Director and
Deputy Managing Directors.
 The Board will appoint independent directors
based on the recommendation of an internal
committee.
 The Centre has appointed Mr.K.V.Kamath as
chairperson of NBFID for a period of 3 years.
MANAGEMENT

 The Centre and the board of NBFID has

appointed Rajkiran Rai G as its managing
director (MD) for nearly five years with effect
from 16-Aug-2022
 The central government will provide grants
worth Rs 5,000 crore to NBFID by the end of
the first financial year.
ROLE OF CENTRAL GOVERNMENT

 The government will also provide guarantee at a

concessional rate of up to 0.1% for borrowing from
multilateral institutions, sovereign wealth funds,
and other foreign funds.
 Costs towards insulation from fluctuations in
foreign exchange (in connection with borrowing in
foreign currency) may be reimbursed by the
government in part or full.
 Upon request by NBFID, the government may
guarantee the bonds, debentures, and loans issued
by NBFID.