Understanding Infrastructure Lending in India

Infrastructure lending is a type of project finance that involves providing long-term loans or equity to infrastructure projects that have a decisive impact on society and the environment. Infrastructure lending can be done by various entities such as banks, non-banking financial companies (NBFCs), infrastructure finance companies (IFCs), infrastructure investment trusts (InvITs), multilateral agencies, sovereign funds, pension funds, etc.

How is Infrastructure Lending different from Conventional Lending?

Infrastructure lending differs from conventional lending in several ways:

• Infrastructure lending is based on the expected cash flows and viability of the project rather than the creditworthiness of the borrower. It improves the gross working capital of the business.
• It requires a thorough assessment of the project's technical, financial, legal, environmental, and social aspects and the mitigation of various risks involved.
• This lending involves a complex structure of contracts, guarantees, and security arrangements among project sponsors, lenders, contractors, suppliers, government agencies, and other stakeholders.
• Infrastructure lending has a longer tenure, usually 10 to 25 years, and a higher interest rate than regular loans.

What are the sub-sectors of Infrastructure Lending in India?

Infrastructure lending in india covers a wide range of sub-sectors that are classified by the Department of Economic Affairs, Ministry of Finance, Government of India, from time to time. Here are some recognised sectors eligible for infrastructure lending:

1. Transport

• Roads and bridges
• Ports
• Railway track, tunnels, viaducts, bridges
• Inland waterways
•  Airport
• Urban public transport 

2. Energy

• Electricity generation
• Oil pipelines
• Electricity transmission
• Electricity distribution
• Oil/gas/liquefied natural gas (LNG) storage facility
• Gas pipelines

3. Water and sanitation

• Solid waste management
• Water supply pipelines
• Water treatment plants
• Sewage collection, treatment and disposal system
• Irrigation (dams, channels, embankments etc.)
• Storm water drainage system

What are the benefits of infrastructure lending?

Infrastructure lending has several benefits for the economy, the society, and the environment. Some of the major benefits are:

• Infrastructure lending stimulates economic growth by creating employment opportunities, enhancing productivity, improving competitiveness, and facilitating trade and commerce.
• It improves the quality of life of the people by providing access to essential services such as water, electricity, sanitation, health, education, and transportation.
• It reduces poverty and inequality by promoting social inclusion, empowerment, and participation of society's marginalised and vulnerable sections.
• It supports environmental sustainability by reducing greenhouse gas emissions, conserving natural resources, and mitigating the impacts of climate change and natural disasters.

What are the challenges of infrastructure lending?

Infrastructure lending also faces several challenges that hinder its growth and development. Some of the major challenges are:

• Infrastructure lending requires vast amounts of capital that are often beyond the capacity of the domestic financial sector. 
• Infrastructure lending involves high risks and uncertainties due to the long gestation periods, regulatory hurdles, land acquisition issues, environmental and social concerns, political interference, and contractual disputes. These risks increase the cost of capital and deter private investors from participating in infrastructure projects.
• It lacks adequate and reliable data on the performance and outcomes of the infrastructure projects. This makes it difficult to monitor and evaluate the projects and to design appropriate incentives and penalties for the project developers and operators.
• It needs more skilled professionals who can manage the complex and multidisciplinary aspects of infrastructure projects. There is also a need to enhance the capacity and coordination of the various institutions and agencies involved in infrastructure development and financing.

What are the opportunities for infrastructure lending in India?

Despite the challenges, infrastructure lending also offers immense opportunities for innovation and growth. Some of the emerging opportunities are:

• Infrastructure lending can leverage new technologies' potential to improve infrastructure projects' efficiency and accountability. These technologies can also enable new business models and revenue streams for the infrastructure sector.
• Infrastructure lending can tap into the growing demand and supply of green and sustainable infrastructure that can address environmental and social challenges and create positive societal externalities. For example, renewable energy, electric vehicles, waste management, etc., are some areas that can attract green financing from domestic and international sources.
• Infrastructure lending can explore the possibilities of alternative and innovative sources and instruments of finance that can diversify and deepen the infrastructure finance market. For example, infrastructure bonds, infrastructure investment trusts, infrastructure debt funds, green bonds, social impact bonds, etc., are instruments that can mobilise long-term and low-cost funds for infrastructure projects.
• Infrastructure lending can benefit from the supportive policies and initiatives of the government that aim to boost the infrastructure sector and create an enabling environment for private sector participation. For example, the National Infrastructure Pipeline (NIP), the National Monetisation Pipeline (NMP), the Production Linked Incentive (PLI) scheme, the Atmanirbhar Bharat Abhiyan, etc. are some initiatives that can provide a fillip to the infrastructure lending.

How can you participate in infrastructure lending?

If you are interested in participating in infrastructure lending, you have several options depending on your profile and preferences. You can either be a lender, an investor, a developer, an operator, or a beneficiary of the infrastructure projects. Here are some ways you can participate in infrastructure lending:

• As a lender, you can provide loans or equity to the infrastructure projects that meet your criteria and expectations. You can either lend directly to the project developers or through intermediaries such as NBFCs, IFCs, InvITs, etc. You can also invest in infrastructure bonds, debt funds, or other instruments that offer fixed or variable returns.
• As an investor, you can acquire shares or units of the infrastructure projects or companies listed on the stock exchanges or other platforms. You can also invest in infrastructure funds, mutual funds, exchange-traded funds, or other schemes offering diversified infrastructure sector exposure.
• As a developer, you can bid for infrastructure projects tendered by the government or the private sector. 

Conclusion

Understanding infrastructure lending in India displays a financial view focused on long-term support for projects crucial to societal and environmental well-being. Unlike conventional lending, it demands meticulous project evaluation and involves complex structures. While presenting economic, social, and environmental benefits, challenges like high capital requirements and lack of data persist. Despite these hurdles, opportunities for innovation abound, driven by technology, green financing, and supportive government initiatives.