RBI allows NBFCs to float infra debt funds, but the pre-requisites to exclude many NBFCs will limit fund collection from low-income groups and as such the exercise is futile...
The Reserve Bank of India (RBI) has allowed banks and Non-Banking Financial Companies (NBFCs) to float infrastructure debt funds in the form of NBFCs or mutual funds. The objective behind this move is to tap the funds for much-needed infrastructure sector in the country through vast reach of banks and NBFCs.
The announcement of this measure was made during the Union Budget 2011-12 to enhance the flow of long-term money into infrastructure projects. The Securities & Exchange Board of India (SEBI), the market regulator of mutual funds in India, has already allowed the mutual funds to set up such funds. The foray of banks and NBFCs is expected to heat up the debt market further.
It is estimated that India will need $500 billion investment in the infrastructure sector within two years. However, the Planning Commissions is not very hopeful of meeting these targets and anticipates a shortfall of up to 12%.
The investors get tax rebate upto an investment of Rs. 20,000 over and above the permissible limit of investments of Rs. 1 lakh.
It is yet to be seen how many NBFCs would be able to take the advantage of this measure, as capital required to set up such a fund is huge. An NBFC sponsoring an infrastructure debt fund in the form of a mutual fund should have a minimum net-owned fund (NOF), or paid up equity and free reserves, of Rs. 300 crore and a capital adequacy ratio of 15%. The net non-performing assets (NPAs), or the bad debt after provisioning, should be less than 3% of advances.
The NBFC should have been in existence for at least five years and profitable in the last three years, “and its performance should be satisfactory”, RBI said in its notification.
“The NBFC should continue to maintain the required level of NOF after accounting for investment in the proposed fund,” RBI said. If the debt fund is in the form of an NBFC, the bank or the NBFC floating the fund will have to contribute a minimum equity of 30% and a maximum of 49%.
The debt fund should have a minimum credit rating of ‘A’ or an equivalent rating from any rating agency. Triple-A is the highest rating. The debt fund should only invest in public-private partnership plans with at least one year of “satisfactory” commercial operation.
The maximum exposure such a debt fund can have to a borrower or a group of borrowers will be 50% of its total capital funds. Additional exposure up to 10% will be allowed at the discretion of the board of the fund.
These pre-conditions would certainly limit the scope. Most of the NBFCs are very small. Besides, NBFCs have penetrated to large number of masses but with small ticket sizes.
They cater the unorganized sector which is less or not exposed to the banking practices. In such a scenario, the incentive of tax benefit does not look attractive for this segment as many might be falling outside the income tax bracket. Therefore, the generation of funds through NBFCs from infrastructure debt funds does not look like a winning card for the government.
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