The Reserve Bank of India will come up with norms next week for banks and non-banking finance companies (NBFCs) to set up infrastructure debt funds. This will lead to release about Rs 1 lakh crore bank loans for core sector projects.

“RBI had issued broad parameters for banks and NBFCs to set up IDFs on September 23 and the regulations that are awaited would be issued shortly, most likely early next week,” a finance ministry official said on Friday.

Infrastructure development funds are set up for long-term refinancing of loans provided by banks to public private partnership (PPP) projects that have taken off so that bank funds get released for lending to more core projects.

Independent rating age­ncy, Crisil in a study had said banks exposure in India to infrastructure projects are about Rs 5 lakh crore and even if 20 per cent of these are refinanced by IDFs, at least Rs 1 lakh crore would be released for providing fresh loans to the sector.

Banks exposure to infrastructure is around 15 per cent of their total advances, which is almost the ceiling prescribed by RBI for the sector. ICICI, IIFCL, SBI, LIC and a few others have evinced interest in setting up IDFs and are awaiting regulations from RBI to takeoff, the official said.

In the eleventh five-year plan, 2007-12, about Rs 20 lakh crore ($500 billion) was being spent on infrastructure and this would be stepped up to over Rs 41 lakh crore (about $ 1 trillion) in the twelfth five year plan. IDFs would have ample scope and most of the infrastructure projects would under PPP mode.

There are about 1,000 PPP projects, many of which would qualify for such refinancing in sectors like highways, airports, ports and metro rails. At of now, there are no PPP projects in the power sector.

Initially several highway projects were expected to be taken up for refinancing, the official said, adding Delhi, Mumbai, Bangalore and Hyderabad airports that have been built under PPP will also qualify for refinancing.

These IDFs will be company based that would be in the form of NBFCs. There would be trust-based IDFs like the mutual funds regulated by Securities Exchange Board of India that has already issued regulations. The company-based IDFs as NBFCs are regulated by RBI. Broad parameters issued by RBI makes it clear that investors in IDFs will primarily be domestic and offshore institutional investors, especially insurance and pension funds that have long term resources. Banks and FIs would only be allowed to invest as sponsors or an IDF.

Presently, insurance and pension funds have not been tapped for long-term infrastructure funding, as there are no IDFs in the country. In Advanced countries, it is IDFs that provide long-term funds to infrastructure by tapping pension and insurance funds having huge resources.

Company-based IDFs can raise resources through issue of either rupee or dollar denominated tradable bonds of minimum five-year maturity. Banks usually provide loans for initial period of infrastructure projects as they are in a better position to make risk assessment. The loans are subsequently refinanced after the projects takeoff and in operation by IDFs.

Typically, special purpose vehicles were formed during the construction stage of infrastructure projects for which banks provide loans and once the projects get operationalised and start paying back, IDFs provide the refinancing releasing the money lend by banks.

Sponsors of company-based IDFs will have to contribute a minimum equity of 30 per cent with a ceiling at 49 per cent. Banks sponsoring the IDFs would be subject to existing prudential limits including limits on investments in financial services companies and limits on capital market exposure.

The IDF shall invest only in PPP projects that have completed one year of satisfactory commercial operation and are a party to tripartite agreement with the concessionaire and the project authority for ensuring a compulsory buyout with termination payment.

The maximum exposure that an IDF can take to a borrower or a group of borrowers will be at 50 per cent of its total capital funds. Additional exposure up to 10 per cent would be allowed at the discretion of the IDF board.