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14 July 2016, Gateway House

Credit guarantees attract investments

Indian infrastructure financing has for long suffered from rating concerns, but recent changes to credit enhancement are helping to plug this gap, enabling investment by foreign insurance and pension companies, and stimulating project exports.

Former Senior Fellow, Geoeconomics Studies

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A small refinancing deal in October 2015, followed by a similar one in January 2016, has supplied a critical missing piece, without which Indian infrastructure financing had been stunted for years. If this elusive financial instrument is now consolidated, it will enable infrastructure projects to attract strategic overseas funding as well as make Indian project exports more competitive.

The first transaction, of October 2015, involves power generator ReNew Power Ventures on one side, and the government-owned India Infrastructure Finance Company Ltd (IIFCL) jointly with the Asian Development Bank (ADB) on the other side. In January 2016, another energy company, Hindustan Powerprojects, concluded a similar deal with the IIFCL-ADB combine. Both ReNew and Hindustan Powerprojects have substantial investments in renewable energy projects.[1][2]

Both companies were refinancing existing bank loans with fresh bond issues—ReNew with Rs 451 crores[3] and Hindustan Powerprojects with Rs 380 crores.[4] The bonds were initially rated lower but were able to improve to AA+ due to “credit enhancement” provided jointly by IIFCL-ADB.[5] This enabled the bond issuers to lower their interest costs and, importantly, attract infrastructure-friendly international investors who have stayed away from Indian infrastructure projects because of rating concerns. The IIFCL-ADB’s credit enhancement has made their participation possible.

Credit enhancements (or credit guarantees) resemble insurance policies: a credible financial institution guarantees (for a fee) a bond issuer’s repayments. Such an assurance helps bond issuers obtain a better credit rating. Participation by multilateral institutions—such as ADB’s involvement in IIFCL’s credit enhancement—provides an additional layer of comfort and improves the rating by multiple notches. IIFCL plans to engage with other multilateral institutions (such as the World Bank) for future credit enhancement deals.

This crucial instrument has strategic geo-economic consequences: it can attract long-term overseas financing into fund-starved infrastructure projects as well as sharpen the competitive edge of Indian project exports.

Credit enhancement makes bonds issued by infrastructure companies eligible for investment by overseas insurance companies and pension funds. Both are custodians of long-term funds and thus ideal investors for long-gestation infrastructure projects. This has another advantage: since they invest for the long term, they remain rooted during periods of volatility.

A geo-strategic tool

Most Indian infrastructure projects were unable to tap into the global pool of insurance and pension savings because of rating restrictions. Indian infrastructure projects—public-private partnerships or completely private-owned—are typically executed through a special purpose vehicle (SPV, a separate company set up only to execute the project), with no recourse to the private sector parent’s balance sheet. In short, in times of crisis or default, SPV investors cannot dip into the parent’s resources. With no previous revenue track record, no visible safety net, and an extended project gestation period, SPVs usually got the lowest rating in the investment grade scale.

This deterred insurance and pension funds from investing in such projects. These long-term investors have strict internal regulatory and risk-management parameters, which includes the lowest credit rating that can be allowed for fixed-income investment. In most cases, it is fixed at AA. Incidentally, even Indian pension funds can invest in infrastructure bonds with a minimum AA rating.[6]

There is another collateral benefit arising from the credit enhancement programme. Deprived of long-term financing, most Indian infrastructure projects became dependent on bank financing, which is short-term. This inherent maturity mismatch has affected bank balance sheets adversely and choked off funding for other projects. According to Reserve Bank of India (RBI) data for March 2016, 16.7% of infrastructure loans advanced by banks have turned non-performing.[7] Credit enhancement now allows projects to replace bank loans with cheaper bond proceeds before they turn sticky; this also frees up bank funds for other greenfield/brownfield projects.

The RBI has also allowed commercial banks to provide partial credit enhancement, subject to certain conditions[8] for infrastructure projects that want to refinance their existing bank loans through bonds with lower interest rates. The availability of this facility will again improve the credit rating of the bonds, allowing a wider segment of investors to invest.

Credit enhancements will have the greatest impact on the infrastructure sector where projects have stagnated for want of long-term financing. According to the erstwhile Planning Commission, India needs approximately $1 trillion during 2012-17 to fix its infrastructure deficit.[9] A large chunk of this will be in the form of debt. But given the banking sector’s concerns on maturity mismatches, this debt has to be sourced from long-term investors at home and abroad. Without the rating upgrade mechanism, this was not possible.

Separately, Crisil Risk and Infrastructure Solutions Ltd and ADB have jointly recommended, in a technical assistance report[10] for India’s finance ministry, the creation of a separate bond guarantee fund. This fund’s shareholding pattern and capital structure should be designed with a AAA rating in mind.

A follow-up to their suggestion looks likely: the government-owned Life Insurance Corporation of India (LIC), India’s largest insurer, is planning to create a separate finance company that will provide credit enhancement to infrastructure bonds;[11]

Other kinds of credit guarantees are also falling into place. Project exporters have been able to lower their borrowing costs and improve their competitive appeal with credit guarantees from agencies like ECGC Ltd. Project exports by Indian public sector engineering companies are often guided by India’s geo-strategic considerations. Over time, many private Indian engineering companies have also started focusing on project exports as a revenue source. But since many of these projects were located in risky jurisdictions (for example, in parts of Africa), bank credit for executing these long-term overseas projects became expensive. Such guarantees therefore go a long way in easing such exports.

Exim Bank too has announced[12] that it will focus on financing Indian project exports over the next three years. According to Exim Bank, Indian companies have a competitive advantage in project exports over some of their global competitors, such as China. This comes from years of executing large projects in developing and poor countries, which have demanding working conditions, which include rough terrain and fickle political climates.

Clearly a single critical financial instrument—credit enhancement—has the capacity to attract overseas investments as well as propel India’s strategic exports.

Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House. He has been a senior business journalist, and Executive Editor, The Economic Times, and served as Head, Policy and Research, at a private sector bank, before shifting to consultancy and policy analysis.

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[1] Homepage, ReNew Power, <>

[2] Homepage, Hindustan Powerprojects, <>

[3] Sen, Amiti, ‘IIFCL Launches Renew Wind Energy’s Rs 451-crore “credit-enhanced” infra bonds’, The Hindu Businessline, 23 September 2015, <>

[4] Hindustan Powerprojects, ‘Clean Energy Arm of Hindustan Power first to place credit enhanced infrastructure bond’, Hindustan Powerprojects Blog, 5 January 2016, <>

[5] Schemes/Products, India Infrastructure Finance Company Ltd, Regular Credit Enhancement Scheme of IIFCL, <>

[6] Pension Fund Regulatory and Development Authority, ‘Investment Guidelines for NPS Schemes’, Circular No PFRDA/2015/16/PFM/7, 3 June 2015, <>

[7] Reserve Bank of India, ‘Chart 2.9: Stressed advances ratios of major sub-sectors within industry,’, Financial Stability Report, Issue No 13, June 2016, p 24, <>

[8] Reserve Bank of India, ‘Partial Credit Enhancement to Corporate Bonds (Notification to all scheduled commercial banks)’, RBI/2015-16/183, DBR.BP.BC.No. 40 /21.04.142/2015-16, September 24, 2015, <>

[9] Planning Commission, ‘Twelfth Five Year Plan (2012-17): Faster, More Inclusive and Sustainable Growth’, Vol. I, Sage Publications India, (2013), p. 18. <>

[10] CRISIL Risk and Infrastructure Solutions Ltd and Asian Development Bank, ‘India: Preparing the Bond Guarantee Fund for India; Technical Assistance Consultant’s Report; Project Number: 44447’, Asian Development Bank, August 2014, <>

[11] Laskar, Anirudh, ‘LIC-led NBFC may offer up to Rs1 trillion credit guarantee’, Mint, July 1, 2016,

[12] S, Arun, ‘Exim Bank’s African credit to boost service exports’, The Hindu, 12 June, 2016, <>