Credit Enhancement Guarantee Fund: Explained

Introduction

Government has picked India Infrastructure Finance Co. Ltd (IIFCL) as the main marketer of a credit enhancement guarantee fund, announced in the 2016-17 budget.
Capital of Rs. 1,500 Crores & will be able to provide assurance for up to Rs. 40,000 Crores worth of infrastructure projects.
It offers a supplementary source of assurance that the borrower will not default on their loan.
It will also help in borrowers raise loans at reduced interest rates.

Eligibility

The infrastructure project must be from the infrastructure sectors as defined under SIFTI.
The sum raised by the way of credit enhanced bonds shall be used only to reimburse the prevailing debt partially or fully.
The infrastructure project must have achieved COD (Commercial Operational Date)/ provisional COD as on the date of extension of guarantee/ credit enhancement by IIFL.
The promoters of the project must not be on the nonpayers list of Reserve Bank of India (RBI) or Credit Information Bureau (India) Limited (CIBIL) and no criminal proceeding has been pending against the promoters.

Requirement of Proposal

India wants around $1 trillion investment in the next ten years for infrastructure, to have a maintainable development & growth.

Importance of Proposal

It will help to improve the credit rating of bonds issued by infrastructure firms.
Helps to attract long-term investments particularly from global insurance, pension & sovereign wealth funds.
It will also help to develop the bond market in India.
Credit enhancement measures can help to reduce interest rate costs by almost two percent.

Difficulties Involved

It is a long tenure initiative as bulky infrastructure projects have long development projects & give returns slowly.

Conclusion

India being the fastest rising economy in the world, it would need such backing initiatives to withstand this growth. Credit guarantee fund is a welcome step. It would also depend on the political efforts of India to attract sovereign wealth & pension funds of various countries.