India's infrastructure funding requirement is gargantuan as it needs Rs 8.6 lakh crore per annum, rating agency Crisil said on Tuesday.
"The funding requirement to build India's infrastructure is gargantuan. Crisil estimates the need at Rs 43 lakh crore over the next 5 years, which translates into roughly Rs 8.6 lakh crore per year," Crisil said in a statement. It said, 70 % of the Rs 43 trillion will be required in just three sectors -- power, transportation and urban infrastructure.
In power, generation (thermal and renewable) will continue to account for the largest share of the investments, followed by transmission, whereas in the transportation sector, investments will be driven towards building national highways and state roads. It said, given the issues of asset-liability mismatches and group exposure regulations of the Reserve Bank of India, banks alone cannot fulfil the needs.
Banks also need to raise large amounts of equity capital at a time when their profitability has diminished which, in turn, reduces their ability to raise capital through internal accrual, it added. Crisil said, "There is a strong need for innovative structures and credit enhancement mechanisms which reduce the risk in infrastructure projects and make them more palatable to investors."
The report highlighted some of innovations such as partial guarantees and future flow securitisation besides some sector-specific instruments such as Green Bonds for renewable energy, which, though nascent, is an emerging option. It said building infrastructure is a capital-intensive process with large initial costs and long gestation periods. Although banks have traditionally been the largest financiers, their increasing exposure to infrastructure projects poses the risk of asset-liability mismatches because the investment horizon is typically long, it said.
"Crisil believes the corporate bond market is better placed to play an active role in funding given its long-term investment horizon. However, as bond investors are risk averse, credit enhancement mechanisms are essential to bridge the gap between their low risk appetite and the higher risk associated with infrastructure projects," it said. Crisil said that it believed that almost three-fourth of investment (73%) will be funded through debt, with banks remaining the largest source of finance (48 %).
Following the Reserve Bank of India's (RBI) easing of norms, external commercial borrowings (ECBs) are expected to be another large source of funds (16.5 % of debt) with nearly Rs 5.2 trillion expected to flow in through this route. The balance Rs 11.2 trillion (36 % of debt) is expected to come through bond issuances, the report said.