IIFCL, LIC to launch credit enhancement guarantee fund

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Mumbai: After months of talks, the government has finally chosen India Infrastructure Finance Co. Ltd (IIFCL) as the lead promoter of a credit enhancement guarantee fund that was announced in the February 2016 Union budget, said two people with direct knowledge.

The credit enhancement fund will be floated by a non-banking financial company (NBFC) with IIFLC holding an at least 26% stake, these people said, adding Life Insurance Corp. of India, or LIC, which was initially mooted to be the lead promoter, will hold up to a 15% stake.

An IIFCL spokesperson confirmed that the company has been appointed as the lead promoter, but didn’t disclose further details. LIC didn’t respond to an email seeking comment.

The fund, which will be Rs1,000-1,500 crore, will be announced in April as the government is still in talks with a few domestic and foreign banks, said the first person cited earlier on condition of anonymity.

A credit enhancement fund provides an additional source of assurance or guarantee that the borrower will service their loan. It can also help borrowers raise loans at reduced interest rates. Last year’s budget had announced this to provide a boost to activity in the infrastructure sector.

With a seed capital of Rs1,500 crore, the fund may be able to provide guarantees for up to Rs40,000 crore worth of infrastructure projects, said the second person cited earlier.

In the initial phase of discussion, LIC was pegged as the lead promoter. However, life insurance norms stipulate that LIC cannot hold more than a 20% stake in such a company, said the second person.

Section 9B (exposure/prudential norms) of Irda’s investment regulations, note 3 says that an insurer’s exposure to a public limited infrastructure investee company cannot be more than 20% of the equity shares of such a company.

“A credit guarantee fund is the need of the hour,” said Pawan Agrawal, chief analytical officer, Crisil Ratings Ltd. “The ability to access the bond market directly has been a critical aspect for infrastructure companies mainly because of the expectation of the investors for a high-safety category rating.”

The rating agency estimates that the total infrastructure funding requirement over the next five years is about Rs. 43 trillion, with a fourth likely to come from the bond market.

According to Agrawal, sponsors also matter because that will be the determinant of the fund’s rating, which is desirably AAA.

“Unless the fund itself is AAA, the ability to enhance the bond to AA category (which the investors are interested in) will become difficult,” he added.