Sources of Infrastructure Finance

Abstract

Infrastructure growth is a critical necessity to meet the growth requirements of the country. Government led infrastructure financing and execution cannot meet these needs in an optimal manner and there is a need to engage more investors for meeting these needs. Even though the Indian financial system has adequate liquidity, the risk aversion of Indian retail investors, the relatively small capitalisation (compared to the large quantum and long duration funding needs of infrastructure finance) of various financial intermediaries requires adoption of innovative financial structures and revisiting some of the regulations governing the Indian financial system. The risk capital required in the infrastructure sector can be understood as the Explicit Capital brought in as equity by the project sponsors and the Implicit Risk Capital provided by the project lenders. Implicit Capital providers seek to manage their risk-return reward by ensuring availability of adequate Explicit Capital and diversification across various projects. Given this profile of the Explicit Capital, greater flow of this risk capital can be ensured by removing the effects of controllable uncertainties in the policy environment and making available the benefits of diversification through alternate mechanisms. New sources of this risk capital can be sourced by providing partial risk guarantees (in form of First Loss Deficiency Guarantees), formation of highly capitalized financial intermediaries and encouraging securitization transactions. In addition to above, various regulatory initiatives and market reforms are required to enable the commercial banking system to participate more vigorously in providing infrastructure financing.