India's central bank will allow banks and non banking financial companies (NBFCs) to set up Infrastructure Debt Funds (IDFs) to accelerate and broaden the funding sources for the country's huge infrastructure spend plans. Finance Minister Pranab Mukherjee, in the budget for fiscal year 2011-12, announced the setting up of IDFs to source long-term debt from both foreign and domestic investors, and also eased taxation rules to make IDFs more attractive to off-shore funds.
The Reserve Bank of India, in rules released Friday, said that IDFs can be set up as mutual funds and NBFCs. However, it said that banks have to stick to the current caps for investment limits in financial services companies and capital market exposure while floating IDFs.
"It gives the flexibility to set up a fund and take money from other players, and some of your exposure you can look to reduce by doing take-out financing," R.K.Bansal, Executive Director, IDBI Bank said, who is working on setting up an IDF. "It can help banks to reduce exposure to the infrastructure sector."
Commercial banks face difficulties in lending to infrastructure projects that have long payback periods as they mostly lend short-term funds, which creates an asset liability mismatch. Most banks are also nearing the maximum limit that they can lend to the infrastructure sector. The government hopes to attract insurance and pension funds into the sector, which globally provides a key funding source for the infrastructure sector.
India may miss a $500 billion target for infrastructure investment for the five years through 2012 by 10-12 percent, Montek Singh Ahluwalia, deputy chairman of India's Planning Commission said last week. The country has a more ambitious aim to spend $1 trillion for the five years that end March 2017.
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