More trials for IIFCL infra credit scheme

The credit enhancement scheme of India Infrastructure Finance Company Ltd (IIFCL) may be delayed further, as the finance ministry has asked the state-run lender to try it out for a few months before final launch.

A credit enhancement product would allow IIFCL to upgrade the rating of infrastructure bonds since the state-owned company is expected to give a guarantee to these papers. IIFCL will evolve the product with the Asian Development Bank (ADB). It is expected to boost the domestic credit market for infrastructure.

“The pilots are likely to start in January. After that, it may take another six months to operationalise the scheme,” a finance ministry official told Business Standard.

The government may give its in-principle approval to IIFCL in about a week to start the pilots. It does not want IIFCL to introduce the full-fledged scheme directly, as this is “new for our environment”.

Under the scheme, IIFCL will provide only 50 per cent guarantee to bonds issued by promoters of infrastructure projects. ADB will re-insure 50 per cent of the guarantee given by IIFCL to infrastructure companies, which may further raise the rating and ensure better marketability of these bonds. Credit enhancement increases the chances of better subscriptions. Earlier, IIFCL was planning to launch the scheme by December 2010.

Creating a better environment for bonds of infra companies is crucial in India, since the core sector has to be improved for sustaining high economic growth. India will be about 10 per cent short of the earlier projections of $500 billion investment in infrastructure during the XIth plan (2007-12). The projection for the next five-year plan is $1 trillion, half of which is expected from the private sector.

IIFCL has commissioned a study aimed at establishing the economic cost of credit enhancement, identifying the timing for introduction and creating a viable economic model, with potential structures and pricing. The terms of reference involved giving estimates on probability of default and loss in such projects.

It would also examine the different forms credit enhancement may take — full credit enhancement, senior-subordinated structures, principal-only guarantees, rolling or fixed, accelerating or continuing. The study would also include views of different stakeholders.