Infrastructure News

CareEdge Ratings’ Rajashree Murkute, ET Infra


<p>Rajashree Murkute</p>
Rajashree Murkute

NEW DELHI: In order to address the funding requirement of India’s infrastructure build up, there has been a long demand for deepening the corporate and municipal bond market. However, the existing regulatory framework needs to undergo some changes for achieving the same.

In an interview to ET Infra, Rajashree Murkute, Senior Director at CareEdge Ratings, outlined that the existing cap on insurance and pension funds’ investment in corporate bonds needs revision, and to address the funding needs of Urban Local Bodies (ULBs), retail participation in municipal bond issuances needs to be encouraged.

Below are edited excerpts:

The existing regulatory framework in India has placed restrictions on insurance and pension funds investment in corporate bonds (limited to AAA papers). Do you think it needs reforms to enable more liquidity for infrastructure companies?

The regulatory framework for insurance and pension funds investment in corporate bonds, necessitating capping on such investments to AAA papers, has been a constraining factor for many years.

In order to address these headwinds and provide for a more enabling investment environment, deepening of the corporate bond market may be explored by pushing the investors to increase their exposure in the ‘A” category and above entities as well as mandatory adoption of EL (Expected Loss) ratings for infrastructure projects, which will expand the basket of eligible projects for monetisation and refinancing.

There is a need to encourage AIFs (Alternative Investment Funds)/ sovereign funds to take exposure in under-construction infrastructure projects. Partial credit enhancements from Multilateral Funding agencies and large financial institutions can be used to facilitate this aspect.

In India, a substantial quantum of infrastructure development is required to be undertaken at the state and city levels. Especially with the large migrating population to cities, the demand for sustainable infrastructure has risen manifold. Therefore, it is imperative to empower the Urban Local Bodies (ULB) to come out with more frequent, sizeable value capital market issuances. If retail participation in ULB bond issuances is encouraged, then substantial resource mobilisation can happen to fund the infrastructure asset creation.

In the absence of a robust domestic corporate debt market, Indian infrastructure players have in the past and continue to opt for dollar-denominated External Commercial Borrowings, especially airport developers. Do you think the trend for ECB borrowings will slowly move towards domestic bond borrowings?

The External Commercial Borrowings has fallen to a four-year low of $27.3 billion in FY23 (Apr-Mar) after a contraction of 33.8% YoY (year-on-year). However, the ECB borrowings rose 3.5 times to $26 billion in five months (Apr-Aug) in FY24 as compared to the $7.4 billion in the previous fiscal year. This signals private capex revival. In the long term, for infrastructure players to move away from ECBs to the domestic bond market, the prevailing interest rate regime should be conducive, and there should be an active secondary market for bond issuances.

How is the inclusion of Indian government bonds into JP Morgan’s Emerging Markets Index expected to help the Indian corporate debt market, which has traditionally lacked robust liquidity?

The inclusion of Indian Government Bonds (IGBs) in JP Morgan’s Emerging Markets Index is a positive development for the Indian debt market, signaling growing global investor interest in Indian securities. As investment options in other countries like Russia and China become scarcer, this move could lead to a more robust bond market in India.

Its important to note that until recently, the majority of IGB investors were limited to insurance companies, fund houses, and pension funds. With increased access for global investors to IGBs, it’s likely that domestic capital and investors will increasingly turn their attention to Indian corporate bond issuances. If strong demand from foreign investors persists, the spreads between Gilts and corporate bonds may narrow over time.

However, the expected foreign inflows of $24-25 billion over a 10-month period starting in June 2024, roughly around Rs 2. lakh crore, fall short of the requirements of the Indian corporate debt market. Therefore, the immediate effects on liquidity enhancement may not be significant in the near term, but the benefits are likely to materialise gradually over time.

What role do you think project financing from banks will play in the future?

Banks remain the predominant source for infrastructure lending, with a total exposure of approximately Rs.12 lakh crore in FY23 (Apr-Mar). When looking at specific sectors, the power sector receives the highest disbursals, making up 50% of the total, followed by roads and highways.

Despite the expansion of investment opportunities and the relaxation of foreign direct investment regulations, construction finance continues to rely primarily on banks and a limited number of financial institutions. While the aforementioned development may lead to increased Indian corporate bond issuances, project financing, especially during the implementation phase, is expected to continue being primarily driven by banks on a sustained basis.

On the other hand, operational projects are likely to actively explore bond issuances to secure financing at competitive rates, ultimately enhancing their overall project returns.

  • Published On Dec 22, 2023 at 12:28 PM IST

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