Infrastructure Finance Companies: An NBFC Institution

Swetha Dhinesh

05 Jul, 2023

The reserve bank of India decided that having a separate category for infrastructure finance NBFCs was important in the public interest and for the bank’s ability to supervise the credit system in the nation’s best interests. One of the activities carried out by the NBFC firm is lending money to infrastructure companies. Infrastructure Finance Loans are mostly given by businesses to the infrastructure industry. 

In India, a particular class of NBFCs known as Infrastructure Finance Companies (IFCs) is dedicated to offering long-term funding for infrastructure projects. IFCs are essential in assisting the nation’s infrastructure sector’s expansion and development. This blog will discuss the infrastructure finance company in detail.

What Is Infrastructure Finance Company?

An infrastructure Finance Company is one of the categories of NBFC or a financial firm that specialises in lending money to infrastructure businesses. The RBI considers An IFC a non-banking financial company in the following ways:

• If at least 75% of its assets are used for infrastructure loans.
• Net owned funds of at least Rs. 300 billion
• The minimum credit score of “A” or equivalent of CRISIL, FITCH, CARE, ICRA, or other rating agencies that accredit lenders.   
• CRAR of 15% (with a minimum Tier I capital requirement of 10%).

What Is Infrastructure Loan?

It refers to the loan facility provided by NBFCs to a borrower for exposure to the infrastructure sectors and subsectors listed below.

What Does Credit Facility Mean Under The Definition Of Infrastructure Loan?

The RBI states that “Credit facility means a term loan, project loan subscription to bonds, debentures, preference shares, equity shares in project companies acquired as part subscription amounts to be “in the nature of advance” or any form of the long-term funded facility provided to a borrower company engaged in developing, operating, and maintaining infrastructure facilities that are projected in any of the sub-sectors as specified.

What Norms Does IFC Follow For Granting Credit/Loan?

IFC awards credit based on the following principles: 

• In lending to
  1. lending to any one borrower at 10% of its own funds (i.e. at 25% of owned funds), 
  2. Lending to any one group of borrowers at 15% of its own funds (i.e. at 50% of own funds).
• In Lending and Investing,
  1. A single party will receive 5% of its owned money (or 30% of all owned funds), and 
  2. A single group of parties will receive 10% of all owned funds (or 50% of all owned funds).
• The current Investment norms, which are outlined in Directions for both single parties and single groups of parties, will not change:
  1. A maximum of 15% of the company’s own funds can be invested in shares of another company, not more than that.
  2. A single group of enterprises may not be invested more than 25% of its Owned Funds in shares of that group.

The Indian Infrastructure Finance Company Limited (IIFCL)

When a minimum of 75% of assets are allocated to the infrastructure sector, an NBFC is authorised as an infrastructure finance company. The Indian government¹, in an effort to address the problem faced by infrastructure businesses, authorised a plan for financing viable infrastructure projects through a special purpose vehicle known as India Infrastructure Finance Company Ltd. “Adopt best practises in financing infrastructure and develop core competencies in facilitating infrastructure development” is the stated objective of IIFCL.

Capital and Other RBI Requirements

Capital Requirements 

(1) Every NBFC-IFC must maintain a minimum capital ratio of Tier I and Tier II capital equal to at least 15% of its total risk-weighted assets on the balance sheet and of the risk-adjusted value of off-balance sheet items. 

(2) The Tier I capital at any given time must be at least 8.5 percent by March 31, 2016, and 10 percent by March 31, 2017, respectively. 

Explanations:

I. On balance sheet assets– 

(1) The balance sheet assets in these Directions have been assigned varying levels of credit risk expressed as percentage weights. Therefore, to get an asset’s risk-adjusted value, the value of each asset or item must be multiplied by the appropriate risk weights. The total must be considered when calculating the minimum capital requirement. The weighted sum of funded components, as described below, will be used to determine the risk-weighted asset:

II. Off-balance sheet items 

In general, NBFC-IFCs must include the risk-weighted amounts of off-balance sheet items that are tied to the market-related and non-market-related off-balance sheet items. This is how they determine the total risk-weighted credit exposure. An off-balance sheet item that causes credit exposure must have its risk-weighted amount determined in two steps: 

• The transaction’s notional amount must be converted into a credit equivalent amount by applying the current exposure method or multiplying it by the designated credit conversion factor; and 

• The equivalent credit amount will then be multiplied by the appropriate risk weight, which is 0% for exposure to the federal government or state governments, 20% for exposure to banks, and 100% for exposure to other entities.

Off-Balance sheet Items are further divided into: 

• Non-Market related Off-balance sheet items
• Market-related off-balance sheet items 
• Current Exposure Method.
• Credit conversion factors for Credit Default Swaps (CDS)

Developmental Role Played by IFCs

IFCs have specialised knowledge and experience in financing infrastructure. They are aware of distinctive qualities and difficulties faced by diverse infrastructure sectors. By facilitating the flow of long-term finance, fostering public-private partnerships, encouraging innovation in project financing, and removing the funding gap for infrastructure projects, infrastructure finance companies help to develop the infrastructure sector as a whole.

Conclusion

IFCs are essential to mobilise and direct money for infrastructure development, bridge the financing gap, and promote sustainable economic growth. IFCs support the development of vital infrastructure assets that drive economic activity that improves living standards by offering long-term finance, expertise and creative solutions.

FAQ

Also, Read: New Trend in NBFC Business Model, Challenges and a Scalable Business model.

1. https://www.india.gov.in/