Promoters of infrastructure projects may soon get to buy an insurance to cover interest payments should the project run into delays due to extraneous reasons, a measure government thinks will reduce risks, lower interest rates and step up lending to the sector. The government is working with state-run financial institutions to launch a product on these lines by the end of this year, said a government official aware of the deliberations.
According to the latest data from the Reserve Bank of India credit to infrastructure sector contracted to 3.9% during March-May 2016 compared to the 0.3% increase a year ago.
“The idea is to set up a fund which will provide protection to promoters at a reasonable fee. The insurance part will kick in if the project gets stuck for extraneous reason, and which are beyond the control of the promoter,” the official said, requesting not to be identified. Asian Development Bank has evinced interest in setting up such a mechanism, he said. The fund will bear the cost of interest payment during such period, thereby ensuring that the account remains standard in the books of lenders.
The latest finance ministry data shows that public sector banks had gross non-performing assets amounting to Rs 4.76 lakh crore in 2015-16, mostly in the infrastructure segment.
“Various mechanisms are being deliberated, which include lead bank to participate in the project specific fund. The idea is to tackle the issue before it becomes a nonperforming asset,” the official said.
He said the newly formed National Investment and Infrastructure Fund (NIIF) can also play a major role in the initiative. The government has set up NIIF with an initial corpus of Rs 20,000 crore with the aim of attracting investment from both domestic and international sources for in frastructure development in commercially viable projects.
According to experts, this insurance fund can help promoters especially in cases where there is a delay in execution and it can work like a revolving fund which may eventually become self-sustainable. “In most cases it so happens that the bank asks the promoter to bring in more equity, which is a huge challenge,” said Jaijit Bhattacharya, partner, infrastructure at KPMG India.
“The insurance fund can step in during such eventuality and provide relief. A portion of the revenue, once the project takes off, can be used to service the interest component of such cover provided,” he said. Another official, associated with a state-run financial institution, said that the product will be on the lines of a mortgage guarantee, which protects lenders in case a home owner defaults on a mortgage loan. “Already, we have similar nature of products in the country and they are doing well,” he said.
India Mortgage Guarantee Corporation offers a product on these lines to both borrowers and lenders in retail housing sector wherein the firm covers a portion of both interest and principal amount if the borrower defaults. Bankers are of view that given the uncertainty in infrastructure lending, a product on these lines will give comfort to the lenders.
“There is a need to push investment in infrastructure sector. Any financial product that helps to assuage the concerns of both borrowers and lenders is a good move,” said RK Gupta, general manager at Bank of Baroda. Bennie Logan Authentic JerseyShare This