FinMin asks rating agencies to adopt a new method for infra projects to obtain higher funding: Sources

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HIGHLIGHTS

  • The government is working to improve the rating of infrastructure projects to help the national infrastructure pipeline
  • Infrastructure projects face 7% funding gap due to lower ratings based on default probability method
  • The Ministry of Finance asks pension funds, including EPFO ​​and PRFDA, to consider the expected loss method for exposure to infrastructure projects

By Meghna Mittal.

New Delhi: The Ministry of Finance is working to improve the rating of infrastructure projects to help the National Infrastructure Pipeline. Infrastructure projects face a funding gap of 7% due to lower ratings based on the default probability method.
The Ministry of Finance has also asked pension funds, including EPFO ​​and PRFDA, to consider the expected loss method for exposure to infrastructure projects. It has asked rating agencies including Credit Rating Information Services of India Limited (Crisil) and ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) to adopt the expected loss method.

The improved infrastructure project rating will help the national infrastructure pipeline by Rs 111 lakh crore. The default probability method leads to a lower score because it marks an infrastructure project as a non-performing asset (NPA) even with a payment delay of one day. The expected loss method takes into account the recovery potential of an infrastructure project after default.

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The Ministry of Finance is in discussion with the RBI and banks to adopt the expected loss method for infrastructure financing. RBI has agreed to adopt both the expected loss method and the probability of default method.

The expected loss method is followed globally because it improves the rating of infrastructure projects.

Infrastructure projects receive approximately 40% of funding from centers and states, an additional 40% from NBFC, and 3% from other sources of funding. They raise about 7% of infrastructure investment trusts (INviTS) and equity and 3% of multilateral funding, which still leaves a shortfall of 7% of funds.

Rating agencies have started to adopt the ELM rating methodology, but it should take some time before the higher rating attracts more funds and closes the funding gap.
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