IIFCL might continue direct lending to niche sectors

For traditional sectors, is open to phased reduction in govt support to remain sustainable

India Infrastructure Finance Company Ltd (IIFCL), a key financing arm of the government, is of the view that it should continue direct lending to niche and infrastructurally underdeveloped sectors with government support. But, for traditional sectors, it is open to the idea of phased reduction in government support to remain a sustainable infrastructure financing institution.

Officials said IIFCL’s view came in response to the recent interim report of the Deepak Parekh committee, which had suggested that IIFCL should discontinue direct lending with government support and should become more as a guarantor, providing loans only for a period of over 20 years to attract long-term financing. The government support is needed for guaranteeing a high-value loan.

However, on providing subordinate debt of long tenure as suggested by the Parekh Panel, officials said the infrastructure lender was willing to provide subordinate debt for long tenor to all infrastructure projects.
 

IIFCL’S VIEWPOINT

• Says it should continue direct lending to niche and infrastructurally underdeveloped sectors
• Open to phased reduction in government support in traditional sectors
• Willing to provide subordinate debt of long-tenure
• Position as lead bank constraints long tenure lending
• Willing to provide take-out financing at pre-bidding stage of a project

Meanwhile, on removing government’s sovereign guarantee support, officials said IIFCL believed that lifting sovereign guarantee support of the government at this stage would further inflate its already high cost of funds and constrain its ability to provide financial assistance to infrastructure sectors at competitive rates.

However, as IIFCL builds the strength of its balance sheet by raising resources without government standing as a guarantor, it could reduce government guarantee support or partial government support could be considered.

“This method would facilitate IIFCL to retain its profitability and balance sheet size to remain a sustainable infrastructure financing institution,” IIFCL informed during a recent meeting to discuss the proposals of Parekh committee, officials said. On the Committee’s suggestion of lending for longer tenure (over 20 years), officials said IIFCL was of the view it is willing to do so, but is constrained by its condition of continuance as a lead bank.

“Also presence in overall operations of project (by providing both long-tenure and short-tenure loans) helps in understanding the risks and diversification of risks,” officials said.

The Parekh panel was constituted by Prime Minister Manmohan Singh with an aim to provide conducive conditions for attracting around Rs 56.3 lakh crore investments in infrastructure sectors in the 12th five-year plan (2012-13 to 2016-17). The committee is expected to give its final report by March 2013. Senior officials from the department of finance and Planning Commission also participated in the meeting.

On substituting take-out financing scheme by an IDF as suggested by the Parekh committee, officials said IIFCL was of the view that to boost infrastructure it could provide take out financing at the pre-bidding stage for a project as well so that the benefits of reduction of interest may accrue to the government agencies (in terms of reduction of viability gap funding or increase in premiums).

This, IIFCL felt, would enhance the viability of infrastructure projects. “Moreover, IDFs are yet to be operationalised and may take time to attain size,” IIFCL said. On evolving as a credit enhancement organisation, officials said IIFCL was of the view that it working towards evolving a regular credit enhancement scheme by undertaking a few pilot transactions with support from ADB.