A long jump for IIFCL

Its planned incorporation into a larger development finance institution could present challenges for a company with a founding covenant that restricted its scale of operations

Government-owned India Infrastructure Finance Company (IIFCL) may not be the lender of choice for the big infrastructure push being planned for the economy but a subset of a proposed larger development finance institution (DFI) that will have a capital infusion of ~10,000 crore. This, at least, seems to be the conclusion from the government’s plan, announced a fortnight ago, to subsume IIFCL within a larger DFI.

Department of Financial Services Secretary Debasish Panda explained that the objective of this manner of incorporation was to give the new DFI a “quick start” since IIFCL has domain expertise and experienced manpower.

The obvious question is why the same institution could not have been propelled into a larger big-project lender by recapitalising it and tweaking the company’s covenant. In fact, those who have worked with IIFCL say that the problem is one of scale and risk aversion. This, however, is not a managerial choice but a government mandate.

IIFCL’S covenant is the Scheme for Financing Viable Infrastructure Projects (SIFTI), which says IIFCL’S lending cannot exceed 20 per cent of total project cost. For takeout financing — a loan that replaces an initial loan — direct lending should not exceed 10 per cent of the cost, and total lending, including take-out financing, should not be more than 30 per cent of the total project cost. In addition, loan disbursements have to be in proportion to disbursements from banks and financial institutions. SIFTI, thus, has prevented the risk of creating non-performing assets on the same scale as its peers Power Finance Corporation (PFC) and

Rural Electrification Corporation (REC) or even public sector banks.

This covenant proved, as IIFCL’S former chairman and managing director S N Goel pointed out, “a big handicap”. The creation of IIFCL in 2006 did not solve the problem of making long-term funding on a large scale available. “It was unable to get external funding. The World Bank was to finance but the terms and conditions were difficult to meet. It put limits like social conditions but IIFCL could not change project conditions,” he explained.

Now, however, IIFCL has managed to channel $2.86 billion from Asian Development Bank, World Bank, EIB, JICA and KFW into the Indian infrastructure sector. With this, it is ADB’S largest financial sector borrower.

Goel feels these problems may disappear with the new DFI since the government will provide substantial capex and at some point PFC and REC will be made part of it. As the government wants to do big things in infrastructure, there is no point continuing with several smaller institutions, Goel said. He foresees that the government will have to fund the DFI initially and get investors later.

According to Goel, IIFCL has done a good job especially since it came out with new products like the takeout finance, subordinate debt, which is a quasi-equity product, and credit enhancement. “It gave a good lift to the bond market. But now it can do that job better after being part of the DFI.”

IIFCL was created in 2006 to provide funds for longgestation infrastructure projects, which those associated with it say was more in conjunction with bank lending than as a pure play lender. This helped the company keep its balance-sheet healthy for some time even as banks and other government-owned financial institutions such as PFC and REC started to face high levels of non-performing assets. Even IL&FS saw its business strategy of being financier and project executor failing. Ironically, though, even the covenant could not protect it from the risks of infrastructure lending.

It reported its first loss in 2017-18 (~1,156 crore) after it provisioned for 16 accounts that had to be written off its balance sheet. One of its pain points was the Jaypee Infratech’s Yamuna Expressway, where it funded ~900 crore in June 2015. Besides, the troubled power sector threw up its own set of challenges for financiers. Things changed for IIFCL from being zero nonperforming asset (NPA) organisation to one writing off accounts. (see chart)

It, however, diversified its portfolio and started focusing on the public-private partnership projects in the highway sector and became a financier to hybrid annuity model (HAM) road construction projects. Consequently, it is the largest lender to HAM projects with disbursements of ~9,951 crore to 59 projects of the National Highways Authority of India. As of January 31, 2021, 26 per cent of its current commitments amounting to ~6,539 crore are to the road sector, which is higher than 21 per cent to power sector amounting to ~5,243 crore.

IIFCL’S current managing director P R Jaishankar said the organisation seems to be over the NPA hump now. “Business is picking up and recovery has been strong. Our net NPAS have declined to 7.67 per cent as of December 2020, from 10.81 per cent in the same period last year,” he said.

The current recession and the upheaval caused by the lockdown last year, however, did create some challenges. Disbursements, for instance, are at ~2,791 crore as of January 31, 2021, well short of the last full year’s ~6,015 crore with only two months left for the financial year. Its sanctions, however, are higher for the 10 months this year at ~13,851 crore compared to ~9,337 crore in 2019-20.

Whatever shape the new DFI takes with IIFCL being part of it, the government is clear about at least one thing and that is to have bigger and more such institutions with a good number being in the private sector.

Even IL&FS saw its business strategy of being financier and project executor failing. Ironically, though, even the covenant could not protect it from infrastructure lending risks