It is estimated that India’s infrastructure sector needs Rs 43 lakh crore of investments over the next five years. Of this, at least Rs 11 lakh crore will have to be funded by the domestic corporate bond market, owing to capital constraints of public sector banks.
Keeping in mind the need for innovative structures to enable long term investors to bridge this funding gap, CRISIL, in consultation with Ministry of Finance and other stakeholders, developed a new credit rating framework for operational infrastructure projects based on ‘expected loss (EL) methodology’.
The ratings assigned under this framework are an opinion on the EL to be incurred over the life of the debt instrument and takes into account not only the probability of default, but post default recoveries too.
The ratings are assigned on an innovative seven point INFRA EL rating scale ranging from CRISIL INFRA EL1 to CRISIL INFRA EL7, with EL1 representing the lowest expected loss, and EL7, the highest.
Thus, CRISIL’s INFRA EL ratings complement conventional credit ratings (based on the probability of default approach) by taking into account the specificities of operational infrastructure projects that contribute towards post default recovery.
It focusses on recovery of dues to investors and lenders over the life cycle of an infrastructure project, by factoring in the possibility of refinance/restructuring, and the presence of embedded safeguards (such as termination payment), thus enabling them in effective pricing of the credit risk.
CRISIL assigned the first Infra EL rating in India in February 2017. CRISIL has so far rated two infrastructure projects in the new scale, with total debt aggregating Rs 454 crore.