H R Khan: Infrastructure financing in India - progress & prospects
Address by Shri H R Khan, Deputy Governor of the Reserve Bank of India, at the Diamond
Jubilee International Conference on Frontiers of Infrastructure Finance 2011, organized by
the Vinod Gupta School of Management & RCG School of Infrastructure Design and
Management, Indian Institute of Technology, Kharagpur, 29 December 2011.
* * *
The speaker acknowledges the valuable contributions of Shri. Himanshu Joshi, Ms. Rakhe Balachandran, Shri.
Prakash Baliga and Shri. Surajit Bose.
Distinguished members of faculty and students.
IIT, Kharagpur is one of the very few educational institutes of India which has a strong
linkage to our struggle for Independence and our vision for the future India. The Institute
started its illustrious journey from Hijli Detention Camp where some of our freedom fighters
were kept captive and had to make the supreme sacrifice for the freedom of our country. As
Pandit Nehru, in his first convocation address in 1956, said "....here in the place of that Hijli
Detention Camp stands this fine monument of India today representing India's urges. India's
future is in the making here." Today, 61 years since the inception of this Institute, our
struggle for freedom from a colonial empire has resulted in emergence of one of the
strongest democracies of the world. But then our struggle for developing our country
continues. I see all the reasons for reposing faith in all the bright students of the next
generation of this Institute, young minds with shoulders to take responsibilities, for a greater
role to play in shaping the future of this country. It is very important to understand and be
passionate about the structure and emerging issues on the growth front of the Indian
economy. All of you must be aware that except for the estimated sub eight percent growth
this year, our country is only next to China in achieving high economic growth rate over the
last few years. However, that is not enough as still a large number of our populace live below
the poverty line. Thus, we have to carry forward this growth performance in a sustainable
and inclusive way to reduce poverty levels in our country. This also assumes further
significance as EMEs like India and China will have to continue as the major contributors to
the global growth, especially in the current context when severe slowdown is afflicting the
advanced countries. There are many structural factors on which we have to focus to achieve
this objective. One important among them is no doubt the development of infrastructure. As
such the theme of today's conference "infrastructure financing" is a very topical one.
The relationship between infrastructure development and economic growth is well
established in the literature. While infrastructure development facilitates economic growth;
economic growth increases demand for more infrastructure. Thus, development of adequate
and quality infrastructure is a necessary, if not sufficient; condition to maintain growth
momentum in any economy. So it is beyond anybody's doubt that India being a country
which has been going through a high growth phase, needs to ensure adequate investments
in the development of infrastructure. However, infrastructure development is an arduous job
for any country as it involves huge investments, long gestation periods, procedural delays
and returns spread over a long period of time. These unique features of infrastructure
development raise some issues which are specific to the financing of infrastructure. My intent
in today's speech is to touch upon these issues in brief particularly from the point of view of
Indian banking system and also present a perspective of Reserve Bank's enabling regulatory
measures.
Investment in the infrastructure sector during the eleventh plan
The eleventh five year plan of India recognized inadequate infrastructure as a major
constraint on rapid growth. Recognizing the importance of infrastructure development in
stimulating economic growth, Government of India planned to raise infrastructure investment
to over 8 per cent of GDP by the end of the Eleventh Five Year Plan (2007-12). The total
revised estimated expenditure for investment in infrastructure during the eleventh five year
plan is estimated at around Rs. 21 lakh crore.
The total investment in infrastructure is estimated to have increased from 5.7 per cent of
GDP in the base year (2006-07) of the Eleventh Plan to around 8.0 per cent in the last year
of the Plan. To step up investment in the infrastructure sector, apart from increasing
budgetary allocation for the sector, the Government has been encouraging the private sector
to participate and invest in the sector. Resultantly, during the past four years, a number of
Public-Private Partnerships (PPP) have come up in the sector. It may be mentioned that
private investments accounted for about 36 per cent of total investment in infrastructure in
the Eleventh Plan.
Table 1:
Revised projected investment on infrastructure
(Rs. crore at 2006-07 prices)
Source: Mid-Term Appraisal of the Eleventh Five Year Plan, Planning Commission.
Projected investment in the infrastructure sector during the twelfth plan
To support the high economic growth, the investment requirements in the infrastructure
sector is estimated to be around 41 lakh crore (revised to Rs 45 lakh crore in the Approach
paper for the Twelfth Plan) during the Twelfth plan period. This implies that infrastructure
investment will need to increase from about 8.0 per cent of GDP in the base year (2011-12)
of the Plan to about 10.0 per cent of GDP in 2016-17. Over the plan period as a whole, the
infrastructure investment is estimated to be about 9.95 per cent of GDP. Financing of this
investment would require larger outlays from the public sector, but this has to be coupled
with a more than proportional rise in private investment. Going forward, the share of private
investment in infrastructure may, in fact, have to increase to 50.0 per cent in the Twelfth
Plan. However, this estimate on infrastructure investment has to be understood with caution
as the underlying assumption is nine per cent growth in GDP throughout the plan period. But
at any case, even with GDP growth of seven or eight per cent, if we want to invest around
ten per cent of GDP in the infrastructure sector, the financing requirement is going to be
huge (Table 2).
Projected investment in infrastructure during the twelfth five year plan
(Rs. crore at 2006-07 prices)
Source: Mid-Term Appraisal of the Eleventh Five Year Plan, Planning Commission.
Now the question is how do we finance it?
First, let us look at the broad pattern of financing of infrastructure in our country before
highlighting some of the issues involved in it. According to the Planning Commission, during
the first three years of Eleventh Five Year Plan, funds from the Central Government budget
financed around 45 per cent of the total investment in infrastructure. The remaining
55 per cent was divided between debt financing (41 per cent) and equity financing
(14 per cent). It is noteworthy that within the debt financing, commercial banks alone
financed around 21 per cent and another 10 per cent was financed by the NBFCs. Notably
other sources of financing, such as, External Commercial Borrowings (ECBs), equity, FDI
and insurance companies financed less than 10 per cent of the total infrastructure investment
each.
Now, having seen the broad pattern of financing of infrastructure, the question is: whether
this pattern sustainable in the long run. Or, to put it differently, what are the issues our
country faces on this front?
Issues in infrastructure financing
Funding gap
Funding Gap is the most important issue that we face on this front. According to the
estimates made by the Planning Commission in March 2010, after taking into account the
recent trends in different sources of infrastructure financing, the funding gap in the
infrastructure sector during the last two years of the Eleventh Five Year Plan is likely to be
Rs.1,27,570 crore, which is around 18 per cent of the total estimated requirement (Table 3).
The slowdown in the economy experienced after March 2010 has further aggravated this
funding gap in the infrastructure sector during the Eleventh Plan. More recently, in the
context of Eurozone debt crisis, accessing external resources by way of ECBs could also
become difficult and this would also accentuate the funding gap.
Funding gap in infrastructure finance during 2010-11 and 2011-12
(Rs.crore)
As per existing pattern, # As per trends.@ Including IIFCL. $ Including FDI.
Source: Planning Commission (2010), Conference on "Building Infrastructure: Challenges
and Opportunities - Financing of Infrastructure", March 2010.
Fiscal burden
We have already seen that almost half of the total investment in the infrastructure sector was
done by the Government through budget allocations. Here the point to be noted is that
Government funds have competing demands, such as, education, health, employment
generation, among others. Given that there is a limit to the Government's financing of
infrastructure, especially in the context of a rule based fiscal policy framework, it is important
to explore other avenues for financing infrastructure.
Asset-liability mismatch of commercial banks
After the budgetary support, next in line for financing infrastructure were funds from the
commercial banking sector. However, it is a well known fact that these are institutions that
primarily leverage on short-term liabilities and, as such, their ability to extend long-term loans
to the infrastructure sector is limited. This is because, by doing so they get into serious
assetliability mismatches.
Takeout financing
Takeout financing offers a window to the banks to free their balance sheet from exposure to
infrastructure loans, lend to new projects and also enable better management of the asset
liability position. In other words, takeout financing enables financing longer term projects with
medium term funds. However, due to several factors the mechanism has not really emerged
as a game-changer. One plausible reason is that the model does not envisage equitable
distribution of risks and benefits. One of the oft repeated arguments is that banks assume
credit and liquidity risk since the inception of the project but once the project is economically
viable, taking out of the loan results in loss of opportunity of earning returns on seasoned
loans. Further, if the original lenders/bankers are required to part with their security interest
fully their residual exposure would be sub-ordinated to the interest of the take out financier.
Investment obligations of insurance and pension funds
From the point of view of asset-liability mismatches, insurance and pension funds are one of
the best suited institutions to invest in the infrastructure sector. This is because, in contrast to
the commercial banking sector, these institutions leverage on long-term liabilities. However,
they are constrained by their obligation to invest a substantial portion of their funds in
Government securities. Of course, in a way, this facilitates the financing of gross fiscal deficit
of the Central Government and hence enables the Central Government to make more
investments. However, this limits the direct investment of these institutions in the
infrastructure sector.
Need for an efficient and vibrant corporate bond market
India has traditionally been a bank-dominated financial system with corporates raising
resources through loan route/public deposits/FCCBs or private placements. This is probably
due to a combination of factors, such as, banks find loan financing convenient as they do not
have to mark to market loans in contrast to bonds, absence of a robust bankruptcy law,
limited investor base, limited number of issuers, etc. This however, does not undermine the
need for developing an efficient and vibrant corporate bond market in general, and for
infrastructure financing, in particular. An active corporate bond market can facilitate long-term
funding for the infrastructure sector. However, despite the various initiatives taken by the
Reserve Bank, Securities & Exchange Board of India and Government of India, the corporate
bond market is still a long way to go in providing adequate financing to the infrastructure
sector in India.
Developing municipal bond market for financing urban infrastructure
For large scale financing urban infrastructure which is assuming critical importance in the
context of rapid urbanization, conventional fiscal transfers to the urban local bodies or
municipals from governments are no longer considered sufficient. There have been some
earnest experimentations by these bodies to tap unconventional methods of financing such
as public private partnerships, utilizing urban assets more productively, accessing carbon
credits, etc. but then these do not address the financing needs. One possible way of
addressing the problem is developing a municipal bond market. Today, the size of the market
is insignificant and distributed among a few municipals of Ahmedabad, Nashik and some
around Bangalore. Given the fact that the credit ratings for the municipalities of the
63 Jawahar Nehru National Urban Renewal Mission (JNURM) cities are regularly released
and quite a few of them are rated as investment grade, we need to provide them avenues to
tap the markets. Absence of the secondary market for the municipal bonds, problems relating
to rating of bonds, accounting practices followed by the municipal bodies, adequacy of user
charges for generating cash flows for servicing of bonds, availability of escrow mechanism
are some of the issues which require to be addressed to encourage investments.
Insufficiency of user charges
It is a well known fact that a large part of the infrastructure sector in India (especially
irrigation, water supply, urban sanitation, and state road transport) is not amenable to
commercialisation for various reasons, such as, regulatory, political and legal constraints in
the real sector. Due to this, Government is not in a position to levy sufficient user charges on
these services. The insufficiency of user charges on infrastructure projects negatively affect
the servicing of the infrastructure loans. Generally, such loans are taken on a non-recourse
basis and are highly dependent on cash flows. Hence, levy and collection of appropriate user
charges becomes essential for financial viability of the projects.
Legal and procedural issues
As mentioned earlier, infrastructure development involves long gestation periods, and also
many legal and procedural issues. The problems related to infrastructure development range
from those relating to land acquisition for the infrastructure project to environmental
clearances for the project. Many a times there are legal issues involved in it and these
increase procedural delays. The added uncertainty due to these factors affects the risk
appetite of investors as well as banks to extend funds for the development of infrastructure.
Given the various issues in financing infrastructure, it is important to glance through what we
have already done for facilitating fund flow to the sector. This will help us in understanding
what more can be done. In fact, it is important to note that both the Central Government and
the Reserve Bank of India have taken a lot of measures to facilitate fund flow to this sector
especially during the recent years.
Measures taken by the central government
Public-private partnership projects in infrastructure
As Government faces a tight budget constraint in the context of a rule based fiscal policy
framework, it was important to encourage the private sector to invest more in the
infrastructure sector. Resultantly, the Government started encouraging Public-Private
Partnership (PPP) projects in the infrastructure sector. PPP mechanism provides built in
credit enhancement for improving project viability by way of buyback guarantee, escrow
arrangement, substitution rights for the lenders, etc. Government has taken several
initiatives, especially to standardize the documents and process for structuring and award of
PPP projects. This has improved transparency in relation to the issues involved in setting up
PPP projects.
Setting up of various committees to simplify the procedures
Recently Government has set up many committees to facilitate more private funding into the
infrastructure sector. These include Committee on Infrastructure, Cabinet Committee on
Infrastructure, PPP Appraisal Committee and Empowered Committee among others. These
were mainly aimed at streamlining the policies to ensure time bound creation of infrastructure
and to develop an institutional framework that would facilitate more flow of funds to the
infrastructure sector.
Viability gap funding
Viability gap funding was introduced in 2006, which provides Central Government grants up
to 20 per cent of the total capital cost to PPP projects undertaken by any central ministry,
state government, statutory entity, or local body. The scheme aimed at providing upfront
capital grant to PPP projects to enable financing of commercially unviable projects. The level
of grant is the net present value of the gap between the project cost and estimated revenue
generation over the concession period based on a user fee that was to be levied in a
predetermined manner.
Foreign direct investment and infrastructure development
To facilitate infrastructure financing 100 per cent FDI is allowed under the automatic route in
some of the sectors such as mining, power, civil aviation sector, construction and
development projects, industrial parks, petroleum and natural gas sector,
telecommunications and special economic zones. Further, FDI is also allowed through the
Government approval route in some sectors such as civil aviation sector, (Domestic Airlines
(beyond 49 per cent), Existing airports (beyond 74 per cent to 100 per cent)); investing
companies in infrastructure/services sector (except telecom); Petroleum and Natural Gas
sector - refining PSU companies; Telecommunications - Basic and Cellular Services
(beyond 49 per cent to 74 per cent), ISP with gateways, radio paging, end-to-end bandwidth
(beyond 49 per cent to 74 per cent, ISP without gateway (beyond 49 per cent); Satellites (up
to 74 per cent) and, mining and mineral separation of titanium bearing minerals and ores
(100 per cent).
Setting up of India Infrastructure Finance Company Limited (IIFCL)
Another major development was the setting up of IIFCL by the Central Government for
providing long-term loans to the infrastructure projects. IIFCL is involved both in direct
lending to project companies and refinancing of banks and other financial institutions. IIFCL
can provide funds to the infrastructure project up to 20 per cent of the total project cost as
long-term debt. Recently, IIFCL has come up with modifications to its takeout finance
scheme, which will make the infrastructure loans cheaper. Further, IIFCL has decided to go
for a transparent and competitive pricing for its takeout financing to ensure fair treatment to
all participants. With this change, all developers irrespective of their size will get same
treatment from the IIFCL depending on the rating of the project.
Relaxation in take-out financing scheme of IIFCL
The pricing mechanism of the recently announced takeout finance scheme of IIFCL is now
based on credit rating of the project and is declared upfront. The rules related to timing of the
takeout have also been changed. While for road projects the takeout can take place after
commercial operation date (COD), for other sectors it has been relaxed to six months. Under
existing norms, takeout financing can only be done one year after the scheduled COD of the
project. Another notable change is that the developer can now approach for take out
financing unlike earlier scheme where only the banks could exercise such an option. Further,
lenders, instead of paying commission to IIFCL, would now be compensated up to a certain
percentage of interest gain accruing to the borrower under the take-out finance scheme.
Besides, interest rates to be charged by IIFCL have now become non-discretionary and
transparent.
Setting up of infrastructure debt funds
In the Union Budget for 2011-12, the Union Finance Minister announced the setting up of
Infrastructure Debt Funds (IDFs) to accelerate the flow of long-term funds to the
infrastructure projects. Accordingly, in November 2011, Reserve Bank of India and the
Securities and Exchange Board of India (SEBI) notified detailed guidelines for setting up of
IDFs which can either be a mutual fund (trusts) (IDF-MF) or an NBFC (companies)
(IDFNBFC). The Scheduled commercial banks are allowed to act as sponsors to IDF-MFs and
IDF-NBFCs with prior approval from RBI subject to certain terms and conditions. Further, to
attract off-shore funds into IDFs, Government of India is contemplating the reduction of
withholding tax on interest payments on the borrowings by the IDFs from 20 per cent to
5 per cent. Income of the IDFs is also expected to be exempt from income tax. The
IDFNBFC can raise resources through issue of either rupee or dollar denominated bonds of
minimum five year maturity. IDFs are expected to channelize funds from insurance
companies, pension funds and other long term sources into infrastructure sector. This will
provide an alternative source of foreign currency funds for the infrastructure projects.
However, certain dimensions need to be kept in mind while assessing the success of the
model. Infrastructure financing presents quite a few challenges viz., little tangible security,
high debt equity ratio, long implementation and repayment periods, etc. Banks and financial
institutions have over the years gained experience and expertise in assessing and pricing
these risks. IDFs are likely to face severe challenges on these issues. Therefore, these
Funds have been allowed to invest only in PPP and post commencement operations date
(COD) infrastructure projects which have completed at least one year of satisfactory
commercial operations. Of course, IDF-MFs can also be set up in respect of non-PPP
projects under higher risk-return framework. If a bank has a mutual fund, then it can float an
infrastructure debt fund, mop up resources from investors, including private equity and
strategic investors, and invest the proceeds in the equity of infrastructure projects. Thus,
IDFs could be game changers in the way infrastructure projects are being financed.
Tapping the retail investor base through infrastructure bonds
To provide further impetus to infrastructure financing, Government of India has permitted
IFCI, IDFC, LIC and infrastructure finance firms to issue long-term infrastructure bonds
providing for tax benefit of up to Rs.20,000 in the year of investment, under the Income Tax
Act. The tax-free status has been granted by the government to these bonds issued only by
designated financial institutions. By introduction of such instruments, the retail base can be
tapped for raising funds for infrastructure projects. Of the proposed Rs. 30,000 crore funds to
be raised, National Highway Authority of India (NHAI) & the Railway Finance Corporation are
raising Rs. 10,000 crore each and HUDCO another Rs. 5,000 crore.
Major steps taken by the Reserve Bank
The Reserve Bank has initiated a number of regulatory measures/concessions for facilitating
increased flow of credit to infrastructure projects. I will briefly touch upon a few of the critical
measures taken in this regard.
Use of foreign exchange reserves for infrastructure development
In India, the increase in quantum of foreign exchange reserves during the decade of 2000,
coupled with escalating infrastructure constraints and the related financing deficit led to a
debate on possibility of using foreign exchange reserves for investment in infrastructure
sector. Although use of reserves for such purposes does not meet the criterion of reserve
management objectives, a special and limited window has been created. Accordingly, IIFC
(UK) Ltd. was incorporated in London and was set up in April 2008. Under this scheme, RBI
invests, in tranches, up to an aggregate amount of USD 5 billion in fully government
guaranteed foreign currency denominated bonds issued by this overseas Special Purpose
Vehicles (SPV) of the IIFCL. The funds, thus raised, are to be utilized by the company for
onlending to the Indian companies implementing infrastructure projects in India and/or to
cofinance the ECBs of such projects for capital expenditure outside India without creating any
monetary impact.
Enhanced exposure norms
In view of the generally large requirements of funds for infrastructure projects, the existing
RBI guidelines provide for enhanced exposure ceilings for the infrastructure lending. The
credit exposure ceiling limits are 15 per cent of capital funds in case of a single borrower and
40 per cent of capital funds in the case of a borrower group. Credit exposure to a single
borrower may exceed the exposure norm of 15 per cent of the bank's capital funds by an
additional 5 per cent (i.e., up to 20 per cent) and a borrower group may exceed the exposure
norm by an additional 10 per cent (i.e., up to 50 per cent), provided the additional credit
exposure is on account of extension of credit to infrastructure projects.
Asset-liability management in the context of infrastructure financing
In order to meet long term financing requirements of infrastructure projects and address
asset liability management issue, banks are permitted to enter into take out financing
arrangement with IDFC/other FIs. Further, banks have also been allowed to issue long term
bonds with a minimum maturity of five years to the extent of their exposure of residual
maturity of more than five years to the infrastructure sector.
Issuance of guarantee
Keeping in view the special features of lending to infrastructure projects, viz., high degree of
appraisal skills on the part of lenders and availability of resources of a maturity matching with
the project period, banks are permitted to issue guarantees favouring other lending
institutions in respect of infrastructure projects provided the bank issuing the guarantee takes
a funded share in the project at least to the extent of five per cent of the project cost and
undertakes normal credit appraisal, monitoring and follow up of the project.
Financing promoters' equity
Banks have been permitted to extend finance for funding promoter's equity in cases where
the proposal involves acquisition of share in an existing company engaged in implementing
or operating an infrastructure project in India, subject to certain conditions.
Relaxation from capital market exposure
In order to encourage lending by banks to the infrastructure, the promoters' shares in the
SPV of an infrastructure project pledged to the lending bank is permitted to be excluded from
the banks' capital market exposure.
Permission to invest in unrated bonds
In order to encourage banks to increase the flow of credit to infrastructure sector, banks are
allowed to invest in unrated bonds of companies engaged in infrastructure activities within
the ceiling of 10 per cent for unlisted non SLR securities.
Relaxation in the classification of investments
Investment by banks in the long-term bonds issued by companies engaged in executing
infrastructure projects and having a minimum residual maturity of seven years are allowed to
be classified under the HTM category, which means they need not be marked to market.
Relaxations relating to asset classification
With effect from March 31, 2008, the infrastructure project accounts of banks were permitted
to be classified as sub-standard if the date of commencement of commercial production
extended beyond a period of two years (as against 6 months in the case of other projects)
after the date of completion of the project, as originally envisaged. With effect from March 31,
2010, if an infrastructure project loan classified as "standard asset" is restructured any time
during the above period of two years, it can be retained as a standard asset if the fresh date
of commencement of operations is fixed within certain limits prescribed by the Reserve Bank,
and provided the account continues to be serviced as per the restructured terms.
Certain relaxations as far as conditions specified for deriving asset classification benefits
under our restructuring guidelines are made in respect of infrastructure exposure of banks
i.e. in respect of repayment period of restructured advances and regarding tangible security.
Infrastructure debt funds
Realizing the potential of Infrastructure Debt Funds in enhancing financing to the sector,
Reserve Bank of India has, as a special case, permitted several prudential relaxations.
Sponsor bank of IDF-NBFC has been permitted to contribute up to 49 per cent of the equity.
In order to enable and encourage higher quantum of take out financing by an IDF-NBFC,
they have been permitted to take-on up to 50 per cent of its capital fund for individual
projects. An additional exposure of 10 per cent can be taken subject to the approval of the
Board. On a case to case basis, Reserve Bank will permit such entities for additional
exposures of another 15 per cent, subject to conditions. Thus, exposure can go up to
75 per cent of the capital funds.
Another significant relaxation is that for the purpose of computing capital adequacy of the
IDF-NBFC, bonds covering PPP and post COD projects in existence over a year of
commercial operation shall be assigned a lower risk weight of 50 percent.
Under the extant provisions of Foreign Exchange Management Act, (FEMA) 1999, Reserve
Bank has allowed investment on repatriation basis by new class of eligible non-resident
investors (viz. SWFs, multilateral agencies, pension funds, insurance funds, endowment
funds) in Rupee and Foreign Currency denominated bonds issued by IDF-NBFCs and Rupee
denominated units issued by IDF-MFs set up as SEBI registered Mutual Funds. IDFs would
in turn lend to infrastructure projects as intermediaries. Further, SEBI registered FIIs, HNIs
registered with SEBI and NRIs have also been allowed to invest in Rupee denominated
bonds issued by the IDF-NBFCs and Rupee denominated units issued by IDF-MFs set up as
SEBI registered domestic Mutual Funds. The original maturity of all the securities at the time
of first investments by such investors shall be five years and the investments would be
subject to a lock in period of three years. All such investments (excluding those by NRIs) will
however be within an overall cap of US$ 10 billion (which would be within the overall cap of
USD 25 billion for FII investment in infrastructure debt).
Other relaxations
Banks are permitted to treat annuities under build-operate-transfer (BOT) model in respect of
road/highway projects and toll collection rights, where there are provisions to compensate
the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to
the condition that banks' right to receive annuities and toll collection rights is legally
enforceable and irrevocable.
In view of certain safeguards, such as, escrow accounts available in respect of infrastructure
lending, unsecured sub standard infrastructure loan accounts which are classified as
substandard will attract a lower provisioning of 15 per cent (20 per cent with effect from May 18,
2011). To avail of this benefit of lower provisioning, the banks should have in place an
appropriate mechanism to escrow the cash flows and also have a clear and legal first claim
on these cash flows.
Banks can finance SPVs, registered under the Companies Act, set up for financing
infrastructure projects on ensuring that these loans/investments are not used for financing
the budget of State Governments.
Introduction of credit default swaps
Further, the introduction of Credit Default Swaps (CDS) would help banks to manage
exposures while increasing credit penetration, and lending to infrastructure and large firms
without being constrained by the extant regulatory prescriptions in respect of single borrower
gross exposure limits. With effect from November 30, 2011, the Reserve Bank of India has
also permitted CDS on unlisted but rated bonds of infrastructure companies and
unlisted/unrated bonds issued by the SPVs set up by infrastructure companies. While
introducing the CDS, which caused considerable regulatory concern during global financial
crisis in 2008-09, a calibrated approach has been followed, focusing on product safety and
systemic stability iss