The Senior Analyst Jan. 2014 | Page 23

THE SENIOR ANALYST For ‘+’ or ‘-‘sign associated with the rating the risk associated remains the same. As per IIFCL guidelines minimum tenure of investment will be 10 years with or without a lock in for 5 years. IIFCL will charge 50% of the interest saving that the developer (Promoter of SPV). Here interest saving is the saving that promoter will make by repaying the bank loans and then obtaining the credit enhanced funds at lower rates. Will Credit Enhancement Mechanism enhance the funding to infrastructure projects? Government of India is planning to spend $1 trillion in 12th Financial Plan 2012-2017. Most of this funding would be achieved through PPP model and active private player participation. Considering the Debt: Equity ratio of 75:25 as a thumb rule for infrastructure project, the requirement of debt funding is estimated to be $375 Billion. Jan 2014 in this project. It will be a win-win situation for all the parties involved i.e. banks won’t have to the asset liability mismanagement risk, Developers will have enough cash flow to suffice their working capital as well as long term financing needs and the long term investors could benefit from the interest rather than keep the cash idle, which is the biggest crime one can commit. Thus CEM opens up the bond market for the infra projects which is in dire need of financing for sustaining in long run. In present economic scenario where infrastructure projects are hung due to policy paralysis along with lack of financing, credit Enhancement mechanism is a clairvoyant step ensuring sustainable infrastructure in long run. By Shubham Gajendragadkar, Pratik Panwala (MDI Gurgaon) In the present scenario banking sector is trying to minimize their exposure to infrastructure sector considering the dismal growth. Also as per Basel – III norms, which is a mandate every bank is required to adhere, high risk is associated with the long term lending. Thereby further reducing the probability of funding to the sector. Asset Liability mismanagement another risk aspect for the banks as the deposits available with bank are for the tenure of 3 – 5 years whereas the gestation period of infra projects is 15 – 20 years However on the contrary the long term investors like PF’s and insurance agency are seating on huge cash pile i.e. $30Bn and $300bn respectively. Also RBI has allowed the FII (Foreign Institutional Investors) investment up to $5bn for credit enhanced bonds. By activating CEM (Credit Enhancement Mechanism) the banks can get their funds back and the long term investors could invest actively Page 23