Bridging the Funding Gap: Growing Role of NBFCs in Infrastructure Financing

Arnab Basu
Head Business Development Infrastructure Project & Structured Finance Aditya Birla Finance Limited
September 7, 2012

Aditya Birla Financial Services Group

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Indian Infrastructure Sector: Growth Driver

Infrastructure development has been identified as a key driver of long term economic growth in India Infrastructure Investment during the 11th FYP was ~$425 billion Infrastructure investment as percentage of GDP grew from 6.44% in FY08 to 8.37% in FY12 During 12th FYP, infrastructure investment envisaged at $1 trillion Infrastructure investment as percentage of GDP aimed to reach ~10% by FY17 Private sector envisaged to contribute 50% of the infrastructure investment during 12th FYP
Infrastructure Investment as % of GDP during FYP XI
10.00% 8.00% 6.00% 4.00% 2.00% 0.00% FY08 FY09 FY10 FY11 FY12

Public

Private

Total

Amounts ($ trillion) FY12

FY13

FY14

FY15

FY16

FY17

12th FYP

GDP
Infrastructure investment as % of GDP Infrastructure Investment

1.40
8.37

1.50
9.00

1.70
9.50

1.80
9.90

2.00
10.30

2.20
10.70

9.20
9.95

0.13

0.14

0.16

0.18

0.20

0.23

1.03

(Source : Planning Commission)

Infrastructure investment at ~10% of GDP critical to sustain high GDP growth Aditya Birla Financial Services Group
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Infrastructure Funding: Significant Opportunity

NBFCs had a share of 10% in overall infrastructure financing space during first three years of the 11th FYP Cumulative outstanding at Rs.1,81,595 Cr ~80% of the outstanding advances were from PFC and REC
To maintain 10% market share in the incremental investment, total outstanding from NBFCs has to grow to ~Rs.8,00,000 Cr by FY17 Planning commission estimates Rs.65,00,000 Cr of nominal infrastructure spend in 12th FYP Represents an opportunity to NBFCs to grow at ~24% CAGR over FY12-FY17

Budgetary Support 45%

Banks 21%

NBFCs 10% ECB 6% Equity/FDI 14%

Proportion of Infrastructure Spend: FY08 to FY10

In addition, estimated funding gap in 12th FYP is ~Rs.12,00,000 Cr Represents a further opportunity for firms looking to fill the void NBFCs are better placed with banks close to hitting sector cap and needing further capitalization with Basel III implementation

Insurance Co's 4%

(Source : Planning Commission)

Infrastructure financing represents a huge opportunity for NBFCs Aditya Birla Financial Services Group
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Infrastructure Finance Initiatives

Several initiatives have been taken to improve sources of funding for the infrastructure sector

Government Initiatives Specialized financial institutions such as REC, IIFCL, PFC, etc. have been formed to provide long term finance (and refinance) for infrastructure projects ECB and FDI norms have been liberalized to attract greater foreign investment in the infra sector A new category of NBFCs - Infrastructure Finance Companies (IFC) - has been created to provide specialized funding to the infrastructure sector Regulations for setting up Infrastructure Debt Funds (IDF) have been issued with the idea of sourcing a larger proportion of long tenor funds, primarily from pension and insurance funds Issuance of long term infrastructure bonds by IFCs to channelize household savings into infra projects

Private sector initiatives Large corporate houses like L&T, Tata, Aditya Birla, SREI, Piramal, and Premji Invest (Azim Premjis arm) have entered the NBFC space MNC banks like Goldman Sachs, Macquarie, and BNP Paribas have formed JVs with Indian players to enter the NBFC space Major private equity player KKR has formed an NBFC to provide debt funds Aditya Birla Financial Services Group
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Infrastructure Financing: NBFC Advantage

Regulatory Push Regulatory changes like formation of IFCs and IDFs have allowed NBFCs to access foreign capital and channel it to infrastructure projects: Through ECB route, or Direct financing through Funds route

Sector Focus Specialized focus on infrastructure leads to deep understanding of risks and mitigation mechanisms Structuring Ability and Risk Appetite Structuring capability allows NBFCs to design tailor made solutions for infrastructure players Differential risk appetite allows products offerings across the entire infrastructure project life cycle
Efficiency and Flexibility Leaner organizations resulting in quicker turnaround time

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Infrastructure Finance: NBFC Product Portfolio

Tenor Long term
Project Finance

General Corporate Loan

Sponsor Funding

Long Term Working Capital Mezzanine Finance

Medium term

Cost Overrun Funding

Refinancing

Asset Finance

Receivables Securitization / Assignment

Short term

Bridge Loan

Financial Closure

Project Loan Disb.

Scheduled COD

Actual COD

Project Timeline

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NBFC Product Portfolio: Sample Transactions

Project Finance 12 year term loan to one of the major players in the logistics segment, to fund setting up of a Multimodal Logistics Park with Inland Container Depots and Private Freight terminals Bridge Loan 1 year term loan to an upcoming five star hotel (part of a major player in retail and hospitality segment), to provide liquidity pending disbursement from long term project lenders Mezzanine Funding Buy-out of 5 year PTCs having beneficial ownership of CCDs issued by a major industrial group based out of Delhi, for investment into infra development for coal transportation

Sponsor Funding Buy-out of 2.5 year residual tenor NCDs issued by a south India based major player in the seed industry Receivables Securitization 1.5 year receivable assignment for an IT park (part of a major pan-India realty player) Cost overrun funding 2 year term loan to a major Infrastructure project developer for meeting cost overrun Refinance 14.5 year term loan to a green-field road project in a metropolitan city 5 year term loan for refinancing project lenders in the Metals & Mining sector
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NBFCs as an Enabling Platform Way Forward

Infrastructure Project Life Cycle Pre-Financial Closure Bridge Finance Financing Construction COD PostCOD Securitization

Project Finance

Asset Finance Cost-Overrun Finance

Mezzanine Finance
Sponsor Finance

Infra. Debt Fund Long Term Working Capital

Government & Regulatory Support

Infrastructure Focused NBFCs

NBFCS bring strong origination skills from extensive relationships NBFCs are specialized allocators of scarce capital NBFCs provide a gamut of services across the value chain Pension & Insurance Funds Development Financial Institutions

NBFCs create a platform for derisking for financial institutions

NBFCs can tap a diverse funding base to match the asset portfolio Export Credit Agencies Domestic & Foreign Banks Corporate & Retail Bonds / Debentures

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Thank You!

Aditya Birla Financial Services Group

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