LIC-sponsored fund seeks relaxed norms

Proposed fund aimed at improving credit ratings of infraprojects urges RBI to relax capital adequacy ratio norms

The credit enhancement fund proposed in this year’s budget to help improve the credit ratings of infrastructure projects has sought a special dispensation from the Reserve Bank of India (RBI) to make it more viable.

The Life Insurance Corporation (LIC)-sponsored fund will be set up as a non-banking finance company (NBFC), but it has sought a relaxation in capital adequacy ratio norms to enable it to support more projects by maximum leveraging of equity capital. LIC has asked RBI to let it maintain a capital adequacy ratio of 8-10% against the norm of 15% for NBFCs registered as infrastructure finance firms, said two people familiar with the development.

As part of measures to deepen the corporate bond market, finance minister Arun Jaitley said in this year’s budget speech that “LIC of India will set up a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long-term investors.”

The government has now decided to make the holding more broad-based. As per the new structure being worked out, while LIC will hold a 49% stake, India Infrastructure Finance Co. Ltd (IIFCL) will hold 20% and a few public sector banks will hold the rest. The fund’s initial corpus is likely to be Rs500 crore, allowing it to provide a guarantee to bond issuances worth around Rs15,000 crore.

An email sent to the RBI spokesperson and to LIC on 9 September remained unanswered. Sanjeev Kaushik, deputy managing director of IIFCL, confirmed that the infrastructure lender will become part of the credit guarantee fund.

“IIFCL already has experience in the credit enhancement space and has been providing this for infrastructure projects. Through this fund, even greenfield projects can be funded,” said Kaushik.

A credit enhancement fund will improve the rating of bonds issued by infrastructure firms and help these projects raise funds from the market from long-term funds like pension and sovereign funds.

Alternatively, it will reduce the pressure on banks to lend to long-term infrastructure projects.

A 30 August Citi India research report said banks will have to make additional provisions and risk weights for future lending to large borrowers, pushing more firms to access the corporate bond market for fund-raising. It estimated that bank lending to this segment could come down to Rs10,000 crore by March 2019 from Rs25,000 crore this year.

Last month, RBI announced a number of measures to deepen the corporate bond market. The central bank said it is considering permitting brokers in corporate bond repos (or repurchases), authorizing them to act as market makers and also allowing foreign investors to directly trade in corporate bonds. RBI said it is also considering accepting corporate bonds as collaterals at its liquidity adjustment facility operations. It also permitted banks to provide partial credit enhancements of up to 50% of the bond issue size, up from 20%.