The pullback of European banks from infrastructure finance deals has prompted public entities and alternative investors to step in.

According to Marsh’s latest Asia director’s series, the gap between infrastructure demand in Asia and funding challenges from commercial banks has created an opportunity for government-backed development, export-import and multilateral financial institutions to take the lead in financing.

Richard Green, managing director and political risk, structured credit and surety practice leader for Asia, tells GTR: “We believe public sector and development bank involvement is here to stay, which is why Marsh was the first broker to establish a dedicated public entity practice within the global trade credit and political risk practice.

“Commercial lenders’ appetite will ebb and flow, depending on their individual growth strategies, capital requirements and regulatory environments. However, the involvement of development banks is a very positive fundamental shift that will help facilitate infrastructure development in Asia, which is critical to the region’s economic and social advancement.”

In the report, Marsh points out that regional Asian lenders have, to some degree, also used European banks’ withdrawal as an opportunity to finance infrastructure projects, “leveraging their greater access to capital due to stronger deposit bases and less regulatory pressure”.

The insurer cites the example of Indonesia’s Bank Central Asia, which has allocated US$2bn to lend to infrastructure projects this year. However, Marsh explains that the perceived high risk in large-scale, long-tenor infrastructure investment is holding these banks back.

Green adds: “Commercial lenders are putting an emphasis on political and non-payment risks, significantly tightening their lending criteria and requiring project sponsors to have mitigation programmes in place. This is driving the demand for political risk insurance and structured credit insurance. As the lending appetite for long-tenor deals continue to be reduced, we expect this trend to continue in 2013 and beyond.”

And as European lenders cut their exposures and Asian players require higher risk mitigation to get involved, governments are making it easier for alternative financiers to get involved.

The Reserve Bank of India (RBI) announced at the start of January that non-banking financial companies categorised as infrastructure finance companies (IFCs) are now able to use external commercial borrowings – money from foreign institutions – for 75% of their owned funds, without having to ask for approval.

Raising the previous 50% limit and cutting red tape, the measure effectively helps IFCs bring in more money faster to on-lend for infrastructure projects.

The RBI also reduced the hedging requirement for the currency risk implied by external commercial borrowings from 100% to 75% of their exposure.