Product Innovations for Financing Infrastructure: A Study of India's Debt Markets
The study assesses the underlying risks to infrastructure projects in India using an empirical and theoretical framework. The study provides evidence that infrastructure assets have robust and stable cash flows and are intrinsically safe.
According to the Planning Commission, India's infrastructure financing requirements will be over $1 trillion by the end of the 12th five year plan period (ending in fiscal year 2016). The bulk of these financing requirements are being met by commercial banks and, consequently, bank exposure to the infrastructure sector is growing at an unsustainable 40% compound annual growth rate.
However, despite this growth, demand for financing is significantly higher than supply. Given the long-term nature of infrastructure assets and the short-term nature of liabilities, the rapid buildup of bank exposure to the infrastructure sector is leading to an increasing asset-and-liability mismatch risk and concentration risk in banks. Bank loans are thus not entirely reflective of underlying project risk and loan pricing controls for liquidity shortfall and refinancing risk due to asset liability management-related issues among other aspects.
Further infrastructure loans in India are intrinsically less risky than generic corporate loans because (i) concession agreements provide for stable and predictable cash flows for many projects; (ii) even in case of stress events, cash flows are likely to continue, albeit at lower levels; and (iii) in case of reduced cash flows, debt restructuring rather than liquidation is the preferred strategy. Further, there is an added comfort by way of backstops provided in the model concession agreements or project developed under the public-private partnership modality.
In this context, the study suggests product innovations designed to assess infrastructure project risk purely on underlying project risk factors and price financing instruments commensurately. This is expected to expand the market for infrastructure financing by (i) reducing costs and thereby improving the commercial viability of projects; and (ii) expanding the suit of financing instruments available to projects and investors in the infrastructure financing space.
- Literature Review and Methodology
- Bank Financing for Infrastructure
- Debt Market Development
- Ongoing and Future Reform Agenda
- Proposed Product Innovations