The government on Friday unveiled the structure of infrastructure debt funds (IDFs), allowing local infrastructure developers access to money from insurance and pension funds from India and overseas, even as bank lending to roads and power projects is constrained by limits set by the central bank.

The problem of inadequate debt resources is compounded by the lack of long term debt for financing  infrastructure projects, which are financed mainly by the commercial banks. Insurance and pension funds do not lend to project companies setting up greenfield infrastructure projects and the bond market  has not matured sufficiently for addressing the needs of such projects. Commercial banks typically lend for the medium term as their asset-liability mismatch prevents them from undertaking long-term commitments.

IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like Insurance and Pension Funds which have hitherto played a comparatively limited role in  financing  infrastructure.  By refinancing bank loans of existing projects the IDFs are expected to take over a fairly large volume of the existing bank debt that will release an equivalent volume for fresh lending to infrastructure projects. The IDFs will also help accelerate the evolution of a secondary market for bonds which is presently lacking in sufficient depth.

An IDF can be set up either as a trust regulated by capital market regulator Securities and Exchange Board of India or as a company regulated by RBI.

A trust-based IDF would normally be a mutual fund that would issue units, while a company-based IDF would normally be a form of NBFC (non-banking financial company) that would issue bonds.

The government plans to allow IDFs set up as NBFCs to sell bonds to refinance PPP projects after construction is complete and a project has been in operation for a year. This will help PPP projects attract long-term funds at lower costs because of lower risks. Normally, PPP infrastructure projects have very high risks associated with them. Once construction is complete, the risks are lowered and the credit rating of the project improves.

If the bank loans are refinanced by an IDF, a large amount of the existing bank debt will be released, which can be used for lending to new infrastructure projects.