MANILA, PHILIPPINES - The Asian Development Bank (ADB) has approved a facility that may kickstart the Indian infrastructure bond market and ultimately channel substantial amounts of domestic and international pension and insurance funds into critically needed energy, railways, roads, water, and other infrastructure and utilities. The guarantee facility, a first for India, will also help make India's bond market deeper and more vibrant, benefitting investors and borrowers.
"Mobilizing additional funds is essential if India is to meet its enormous infrastructure financing needs. Plus, it's important to prevent over-reliance on bank financing and to ensure that capital markets play a financing and risk mitigation role," said Vivek Rao, Senior Finance Specialist in ADB's South Asia Department.
Poor infrastructure slashes 2 percentage points off India's economic growth every year, according to the government. India aims to invest $1 trillion in infrastructure over 2012-17 of which some $350 billion is expected to come in the shape of private sector debt. Currently, banks provide the vast majority of infrastructure loans, but are now reaching their lending limits. Infrastructure bonds, meanwhile, have not been used, despite an enormous pool of savings which need a long term home with strong and stable returns.
Under this first-of-a-kind $128 million (Rs7.168 billion) facility, developed with India Infrastructure Finance Company Limited (IIFCL), ADB and domestic finance companies will provide partial guarantees on rupee-denominated bonds issued by Indian companies to finance infrastructure projects. ADB will then take on a part of that guarantee risk.
The partial credit guarantees that ADB will provide alongside IIFCL and other finance firms will boost the credit rating of a typical infrastructure project from BBB- or A to AA. This will allow cash-rich pension funds and insurers, which can only invest in assets graded AA or above, to buy the bonds. Replacing bank debt with bonds will, in turn, allow banks more room to provide loans to other infrastructure projects and businesses. In time, international investors are also expected to look to buy Indian bonds.
The infrastructure developer expected to benefit from the facility is GMR Group, which is seeking to sell a bond to refinance a loan taken to build and operate part of a toll expressway linking Hyderabad and Bangalore. Over the next three years, the facility should provide partial guarantees on up to five infrastructure project bonds. Having proven the concept, ADB then expects that such credit guarantees will become well established in the market and ADB can move on to support Indian infrastructure development in other ways.
"Credit enhancement will provide the critical missing link which will allow insurance companies and pension funds to put their sizeable cash to work in the infrastructure sector," said Siddhartha Shah, senior Investment Specialist in ADB's Private Sector Operations Department.
Insurance companies have an estimated $300 billion of cash to put to work while pension funds have an additional $30 billion. Long-term investments that are needed for infrastructure companies also best match insurance and pension liabilities.