To leverage more infrastructure development funds, India should establish a specialized institution dedicated to credit-enhancing corporate bonds.
Hindustan Powerprojects settled just last week a Rs1.3 billion ($19.6 million) project bond to refinance its 15-megawatt solar power plant in Porbandar, Gujarat in India. Through an IIFCL first-loss partial credit guarantee, with an ADB counter-guarantee, the bond achieved a CRISIL rating of AA+ and became the second bond—after ReNew Power Ventures—under ADB’s Credit Enhancement of Project Bonds facility.
Although these transactions demonstrate clearly that credit guarantees can make infrastructure projects appetizing for risk-averse institutional investors—thereby freeing India’s gargantuan domestic savings for infrastructure—they’re actually peanuts. To bring more funds to the table, the Government of India should establish an institution dedicated to credit-enhancing corporate bonds.
Does India really need another infrastructure financing initiative? There is already a plethora of infrastructure financing initiatives. In addition to the IIFCL-ADB credit enhancement scheme, recent years have seen infrastructure debt funds, infrastructure investment trusts, and most recently a Reserve Bank of India (RBI) notification allowing all scheduled commercial banks to provide partial credit enhancements.
Yet, despite this, a bond guarantee fund—owned by private institutions with minority state ownership—should be added to the menu.
First, infrastructure is the elephant in the room. India’s economy has many strengths: dynamic entrepreneurs, political stability, a young labor force, etc. However, its lack of world class infrastructure is holding back growth and development. Modernization is critical and expensive so India needs all the options it can get to drive more finance toward energy, transport and other key infrastructure.
Second, more institutions need to be involved in financing. The 12th Five Year Plan targeted infrastructure investment of Rs65 trillion, an elephantine amount. Traditionally, government and banks have provided the cash. However, the former must balance that with other spending priorities, and the latter must contend with asset-liability mismatches, exposure concentrations, capital shortages, and weakening loan books.
Third, specialization is required. Even though IIFCL is successfully providing credit enhancements and the recent RBI guidelines will allow all scheduled commercial banks to do the same, a dedicated institution like a bond guarantee fund would promote efficiency and mitigate mission drift.
Fourth, competition would bring benefits. Increased supply will not only tame guarantee fees but also unbind demand—that is, the more credit enhanced bonds in the market, the more familiar institutional investors will become, and the lower the interest premium they will demand.
Finally, bigger guarantees are essential. IIFCL can guarantee a maximum 50% of bond principal while specialized commercial banks can guarantee up to 20%, but to achieve a rating of AA, most infrastructure projects require credit enhancement well above 20%. In neither case, can they provide a full 100% credit wrap necessary for a rating of AAA, a must-have for some institutional investors.
CRISIL Infrastructure Advisory, under the leadership of India’s Ministry of Finance and through an ADB technical assistant grant, has already prepared the business plan for a bond guarantee fund for India. It’s time to charge forward with the initiative because it takes more than peanuts to get an elephant moving.