Credit ecosystem rejig and policy stimulus needed for infrastructure (Live Mint)

Mains Paper 3 : Economy
Prelims level : Credit ecosystem
Mains level : Infrastructure

Context

• The share of bank credit to infra declined to 11.5% in FY18 after peaking at 15.2% in FY15
• As India’s infrastructure funding gap widens to gargantuan levels, a fiscal push won’t be enough.
• What’s needed is a complete overhaul of the credit ecosystem plumbing so that private money starts flowing in materially.
• National Democratic Alliance government has committed to infusing ₹100 trillion into infrastructure over the next five years.
• But this magnitude of commitment will run into fiscal constraints sooner rather than later.
• And if that weren’t enough, the share of private sector investment in infrastructure has slumped, touching a decadal low of ~25% in fiscal 2018.

Why’s that?

• The share of bank credit to infrastructure has declined steadily to 11.5% in fiscal 2018 after peaking at 15.2% in fiscal 2015. Last fiscal, it showed only a marginal uptick to 12.2%.
• This reflects two things: a continuing stressed assets problem and deceleration in new bankable projects.

What can win back lender confidence and revivify infrastructure investments?

• Revitalize the bond and credit markets: No doubt, bank lending and capital market refinance are ideal to fund an infrastructure project, once stabilized. For this, long-term funds need appropriate investment avenues to match risk appetites. Developing credit enhancement products/other innovative instruments is one way. Pooled finance structure for urban local bodies is a case in point.
• The government could establish a bond guarantee or credit enhancement fund for infrastructure. Such a fund can provide guarantees to credit-enhance bond issuances by infrastructure special purpose vehicles with a minimum BBB (investment grade) credit rating. That would win over capital market investors and pension and insurance funds.
• The use of expected loss (EL) rating scale designed by leading credit rating agencies in India, as opposed to the conventional probability of default (PD) rating scale, must be promoted for infrastructure projects. The EL scale will provide long-term capital market investors such as pension and insurance funds a finer touchstone to invest in operational assets. But for this to happen, regulations must facilitate the use of this scale.

Catalyze patient capital:

• Patient capital from insurance and pension funds is naturally suited to long-term infrastructure projects. However, guidelines governing their investment are not aligned to this need. This needs to be examined closely.
• Asset monetization can help asset owners and/or banks reduce debt burden or churn their asset portfolio and create headroom for further investments.
• The government could put non-core assets of public sector units such as land parcels, real estate, etc., on the block. Toll-operate-transfer projects and infrastructure investment trusts also need to pick up in scale.
• Newer avenues such as loan asset monetization through securitization can also be examined. This will help banks diversify risks, while recycling capital to finance critical infrastructure needs.
  Improve lender confidence in private investments:
• Enhancing project preparation and ensuring the sanctity of executed contracts will be key enablers for banks to warm up to financing infrastructure projects.
• A wider range of public-private partnership models with recalibrated risk-sharing and balanced contracts need to be employed.

Conclusion

• Persistent and collaborative actions on all these fronts can help resolve sectoral issues and create a nurturing credit environment for infrastructure investments to flourish in.

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Prelims Questions:

Q.1) With reference to The Energy and Resources Institute (TERI), consider the following statements:
1. It is an autonomous body under the Ministry of New and Renewable Energy.
2. It developed the Green Rating for Integrated Habitat Assessment (GRIHA), a national rating system for
green buildings in India.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B
Mains Questions:
Q.1) What can win back lender confidence and revivify infrastructure investments?