Future of Infrastructure Financing: 7 Takeaways from Yubi’s Conversation with Arnab Basu

Infrastructure connects people and businesses, supports complex supply chains, and helps create opportunities for mobility, employment, and education. 

Ultimately, infrastructure is at the heart of the economy, helping catalyse a country’s economic development and GDP growth. But, as we all know, adequate financing is crucial for delivering, and maintaining infrastructure assets. 

Infrastructure financing can come from various capital channels and involve multiple types of financial structures and instruments. Regardless of the channel or instrument, the goal remains the same: to finance infrastructure projects and transform them from blueprints to tangible public assets.

In our video series ExpertTake, we talk to industry leaders to clarify facts and bust myths about infra financing. In the latest edition, Yubi Build’s Shubham Jain spoke with Mr. Arnab Basu a veteran in India’s infra financing ecosphere and the COO for Project & Structured Finance at Aditya Birla Finance Ltd.

7 Key Takeaways About the Future of Infrastructure Financing

Here are the key points highlighting Mr. Basu’s take and perceptive insights on India’s infrastructure sector:

1. India’s Infra Sector has Evolved in Recent Years and Many of Its Erstwhile Challenges are a Thing of the Past

Over the past decade, several policy initiatives and government interventions have emerged in India’s infra sector. Simultaneously, some large Private Equity (PE) players have entered the market and widened the country’s infra financing space.

They are playing a part in streamlining the industry and in ensuring that more infra projects are initiated and completed. Their presence and financial might has also helped eliminate many of the challenges that battered the industry in the past, particularly around project implementation and linkages.

Mr. Basu notes in particular that project financing portfolios have matured in terms of performance, quality, and delinquency. Further, even though project finance exposures are expected to be long-dated, banks and NBFCs are refinancing them quickly and at low interest rates. This positive development shows the potency and strength of these exposures, and augurs well for the sector and for India.

Mr. Basu says that sub-sectors like logistics, roads, and renewables are doing especially well and are great examples of the strong status of infra project financing in India. Additionally, lenders now enjoy “a very good standard and healthy portfolio” – a situation that Mr. Basu and Yubi believe will continue in the future. 

2. Several Factors are Contributing to the Health and Robustness of Infrastructure Investor Portfolios

Mr. Basu elucidated on the primary factors that enable lenders in the infra space to create robust investment portfolios. One, government policy initiatives have streamlined the sector. Two, fast approvals speed up the pace of project roll-out. In addition, project sponsors bring advanced experience to each project, resulting in satisfactory implementation.

Finally, lenders also bring their valuable expertise to the table to ensure that approvals are in place and a majority of the land is controlled by the sponsor. These checks-and-balances guide their decision-making, ensure fast disbursements, and improve the implementation pipeline. All these factors contribute to investor maturity, and by extension the health and robustness of their portfolios.

3. Private Equity Players are Interested in Operationally Stable Projects

In recent years, the Indian infrastructure sector has attracted many large PE players who have brought capital and liquidity as well as greater discipline and technological know-how. Mr. Basu avers that these are all positive developments that will benefit the sector in future.

But these players are mainly interested in operationally-stabilised projects. This is because many of them, according to Mr. Basu, “burned their fingers” in the past by financing unstable projects. Following underwhelming returns and investment experiences, many of them consciously decided to focus only on projects that are already stable and therefore more likely to yield good returns.

But now, these larger PEs are leveraging technology and platforms like Yubi Build that enable them to create, originate, and fund potentially profitable projects, even if they are not completely operationally stable.

Furthermore, these platforms, combined with the expertise that these investors have developed over the years are helping to regenerate confidence in lending and creating a healthier climate for infra financing. 

4. Infrastructure Investment Trusts (InvITs) are Great Catalysts of Collaboration Between Infrastructure Borrowers and Lenders.

Infrastructure Investment Trusts (InvITs) enable developers to monetise their revenue-generating infra assets and investors to invest in these assets without actually owning them. Developers benefit because they can release capital to fund new projects and investors benefit because they get predictable returns.

For now, most InvITs are privately listed. However, institutional investors like sovereign wealth funds (SWFs) and pension funds are increasingly keen on InvITs. Reason: they manage patient, long-term capital that bring long-term returns that InvITs can provide.

To capture more investments in InvITs, Mr. Basu suggests that the taxation regime needs to improve. He suggests taxing investors on long-term capital gains similar to equity investors. Doing this, he believes, will attract even more public investors in InvITs.

5. RBI’s Increasing Intervention in the Infrastructure Sector is Enabling Transparency and Creating Opportunities for Many Lenders

Post the IL&FS liquidity crisis of 2018, the Reserve Bank of India (RBI) is has been intervening in India’s financial sector more than ever before. It has also adopted a “scale-based approach” to regulate large banks and NBFCs who pose a substantial systemic risk to the sector. Such interventions will bring greater transparency into the infra financing space and help to create win-win propositions for all stakeholders.

Fortunately, many NBFCs have aligned themselves with the RBI’s stringent regulations – even those imposed primarily on banks. And this will benefit infra financing in the country. At the same time, Mr. Basu says that NBFCs should continue to shore up their strengths around end-use flexibility and technological expertise.

Many end-uses, such as M&A activities are not particularly “bankable”. Mr. Basu suggests that NBFCs should look at these structured or “mezzanine” opportunities because they can potentially get higher yield pickup and meet their returns expectations. Overall, he believes that even with RBI’s stricter regulatory regime, the situation is still positive and optimistic for NBFCs.

6. Limited Participation of Long-Term Investors like Pension Funds and Insurance Companies in Infrastructure Financing

Historically, very few long-term investors have participated in India’s infrastructure financing sector. Per Mr. Basu, their hesitancy stems from the market’s lack of maturity.

Furthermore, in recent years, more banks are funding infra projects thanks to available liquidity. Consequently, developers don’t feel the need to approach other potential investors like insurance companies or pension funds, thus limiting their participation.

7. IIFCL’s Partial Guarantee Scheme is Only a Partial Success Due to Banks’ Continued Willingness to Finance Infra Projects

In 2013, the India Infrastructure Finance Company Limited (IIFCL) announced a partial credit guarantee scheme (PCG) for bonds issued by some infrastructure firms. The PCG was part of its credit enhancement initiative for the infra sector.

But Mr. Basu candidly stated that the scheme has not really taken off. Again, it’s because banks have stepped in to provide financing for infra projects, limiting the need for the PCG. But he remains positive that as the sector evolves, the need for more investors will increase along with the need for the PCG.

In this edition of ExpertTake, Mr. Basu generously shared his insights about India’s infrastructure financing sector. He reiterated the need for an infrastructure development institution, which is already being rolled out.

Furthermore, he said that platforms like Yubi Build that connect borrowers with lenders play an increasingly significant role in the future. He believes that such platforms will be vital to ensure that instruments are properly packaged or “bunched” and  increase retail participation in public InvITs and REITs.

Yubi Build connects infra borrowers with a network of 100+ lenders, enabling them to access much-needed financing, reduce project TAT, grow their businesses, and contribute in tangible ways to India’s growth story.

Watch the full video with Mr. Arnab Basu here.