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
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