IDBI to float infra debt fund

Public sector lender IDBI Bank will float an infrastructure debt fund (IDF) to accelerate the flow of long-term resources for projects in sectors such as power, ports and roads. It may use the mutual fund route to start it.

R M Malla, chairman and managing director, said the bank had a definite interest in floating such a fund and the details were being worked on. He did not elaborate on size or details.

Being an erstwhile development finance institution, IDBI Bank has expertise in project appraisal and monitoring of large projects. This helps in examining the viability of projects, assessing risks and pricing loans. State Bank of India, ICICI Bank and Axis Bank are other lenders with strong in-house expertise for infrastructure projects.

Another IDBI Bank official said, “The government has given a choice to either use the asset management company (mutual fund) route or the non-banking finance company (NBFC) route to float an IDF. The bank already has an active mutual fund and this may become a vehicle to start the IDF.”

In the last week of June, the government came up with a framework for floating and regulating IDFs. These will have to be registered in India and monitored by one of the financial regulators. A trust-based IDF (mutual fund) will be regulated by the Securities and Exchange Board of India. Reserve Bank of India will oversee a fund set up as a NBFC. The investors in units floated by an IDF would primarily be domestic and offshore institutional investors, especially insurance and pension funds, who have long-term resources. Banks and financial institutions would only be allowed to invest as sponsors of an IDF.

An IDBI official said besides tapping offshore long-only investors, IDFs would also target local insurance and pension funds.

The government has announced tax benefits for investors in IDFs. Budget 2011-12 had said the witholding tax on interest payments on borrowings by IDFs would be reduced from 20 per cent to five per cent. The finance minister had also exempted income of the IDFs from income tax.

IDFs are expected to pick up part of the existing infrastructure loans of banks. This would free up the resources and capital of banks for fresh lending.

IDBI Bank’s outstanding portfolio of infra loans was Rs 20,000 crore. It could transfer part of the loans to IDF, subject to regulatory norms, said the official.

Infrastructure projects have a long pay-back period and need long-term financing to be sustainable and cost-effective. Banks, the main source of funding for these projects, are unable to provide long-term funding due to their asset-liability mismatch. Banks are also approaching their exposure limits. IDFs, through innovative means of credit enhancement, can provide long-term low-cost debt from insurance and pension funds.

Source: Business Standard