What are Infrastructure Bonds?

Introduction

Mumbai’s skyline, with its skyscrapers piercing the clouds, shows ambition and modernization. As the financial capital, the city has seen an infrastructure boom over the past decade. The Trans Harbour Link, Metro, and Coastal Road projects will make the city more interconnected. However, the current infrastructure still doesn’t provide enough relief. Traveling 6 kilometers in less than 45 minutes is still a distant dream. This shows there’s a lot of work to be done when it comes to revamping the infrastructure of Mumbai, and indeed, the entire country. A nation’s infrastructure directly impacts its growth; better infrastructure leads to faster economic advancement. And one such financial instrument that directly contributes to this growth is Infrastructure Bonds, or more commonly known as ‘Infra Bonds’.

Let’s explore the world of Infra Bonds, exploring their significance, benefits, and the role they play in shaping the future of our cities and country.

What are Infrastructure Bonds

Infrastructure development is the backbone of any thriving economy. It facilitates trade, supports economic activities, and improves the quality of life for residents. Roads, bridges, railways, and airports are not just structures; they are the arteries of economic growth. Financing these massive projects often requires significant capital, and this is where infrastructure bonds come into play.

Infrastructure bonds are debt securities issued by entities such as PSUs, banks, etc. to finance infrastructure projects. These bonds have long-term maturities and are used to fund projects such as highways, bridges, tunnels and public transportation systems. The proceeds from these bonds are specifically earmarked for infrastructure development. By issuing these bonds, entities can raise the necessary capital to invest in essential public assets without immediate financial strain. Investors, in turn, receive a stable and lucrative return on their investment.

It’s important to note that infrastructure bonds are different from tax-saving infrastructure bonds. In 2010, the government introduced Section 80CCF in the Income Tax Act, allowing an additional deduction of Rs 20,000 for infrastructure bonds. But this section was discontinued in 2013-14.

Benefits of Investing in Infrastructure Bonds

Stable Returns: Infrastructure bonds typically offer fixed interest rates, providing a predictable income stream for investors.

Long-Term Investment: With maturities often ranging from 10 to 15 years, these bonds are ideal for long-term investors looking to diversify their portfolios.

Portfolio Diversification: By including these bonds, investors can balance their portfolio risk, particularly during volatile market conditions. This diversification helps in spreading risk across different asset classes and reduces the impact of market fluctuations.

Contribution to National Growth: By investing in these bonds, individuals can contribute to the development of critical infrastructure, aiding in national growth and development.

Risks of investing in Infrastructure Bonds

Interest Rate Risk: As with any fixed-income security, the value of infrastructure bonds can be affected by changes in interest rates.

Liquidity Risk: These bonds may not be as liquid as other investments, making it difficult to sell them before maturity.

Current Trends in the Infrastructure Bond Market

The government has encouraged banks to raise infrastructure-dedicated bonds, which fund infrastructure projects, affordable housing, renewables, and more. These bonds offer banks a cheaper way of raising money since they don’t have to maintain a 4.5% Cash Reserve Ratio (CRR) or an 18% Statutory liquidity Ratio (SLR) required for traditional deposits.

As credit growth in the banking system has outpaced deposit growth, partly due to people shifting from traditional fixed deposits to other financial assets, banks face a mismatch in the credit-to-deposit ratio. Consequently, they are exploring alternative fundraising methods to continue their core business of lending, significantly benefiting from this shift.

Additionally, in the current interest rate cycle, infrastructure bonds offer a chance for portfolio diversification, filling the gap of long-term bonds in the country. Pension funds and insurance companies, which have long-term liabilities, find infrastructure bonds particularly attractive as they match their long-term assets, resulting in high demand from the institutional sector. At the time of penning this article on July 23, 2024, Rs 11,11,111 crore has been allocated for infrastructure development in the Union Budget 2024.

Conclusion

There is a genuine need for increased infrastructure projects in India, especially with recent issues such as bridge collapses in Bihar and the collapse of the roof at Terminal 1 of Delhi International Airport after heavy rain. In these myriad problems, financing through bonds might be the solution to address India’s infrastructure needs. The Mumbai Metropolitan Region Development Authority (MMRDA) has received approval to raise up to Rs 50,000 Crore through bonds. These funds will contribute towards ambitious projects aimed at improving transportation, reducing congestion, and enhancing the quality of life for residents in Mumbai and its surrounding areas. Probably the younger generations of Mumbaikars might get a breather and won’t have to spend hours in traffic thanks to these bonds.

FAQs

Q: How do infrastructure bonds work?

A: Governments and corporations issue infrastructure bonds to raise capital for large-scale infrastructure projects. Investors purchase these bonds and receive periodic interest payments. The principal amount is returned to investors at maturity.

Q: Are infrastructure bonds the same as tax-saving infrastructure bonds?

A: No, infrastructure bonds are different from tax-saving infrastucture bonds. The latter offered tax benefits under Section 80CCF of the Income Tax Act, which was discontinued in 2013-14.

Q: What is the typical maturity period for infrastructure bonds?

A: Infrastructure bonds typically have long-term maturities. The RBI allows banks to issue infrastructure bonds with a maturity of 7 years or more, often ranging from 10 to 15 years.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.