Lending to roads, power, infrastructure is what hurt Indian banks. Loans given to these sectors form a large part of the Rs 10 lakh crore in stressed assets that the banking sector is struggling to rid itself of.
Even as that process is underway, well-capitalised lenders have restarted the process to lending to some of these sectors. Bankers say that it's different this time with projects being structured in a way that they are more bankable. To be sure, the pick-up in lending is still small and not enough to move the needle at the industry level, where credit growth continues to languish at multi-decade lows of near 5 percent.
Power transmission, roads and, more recently, airports are among the areas that lenders are venturing back into. Projects today are being backed by stronger promoters and, in the case of government driven infrastructure projects, are structured better. This has meant that typically risk-averse lenders like HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. are also looking to lend to segments that they may have shunned in the previous cycle.
“The only way to describe it is that the men have been separated from the boys now. Instead of bankers doing the tough job of separating a deserving borrower from a non-deserving one, the market has chosen for us,” Manish Kothari, head of large and mid-corporates at Kotak Mahindra Bank, told BloombergQuint in a meeting last week.
Sectors where new lending has picked up include hybrid annuity projects in the roads sector, transmission projects in the power sector and regional airports. In the first two of those three segments, bankers said that new models brought in by the government have made it safer to lend.
“The hybrid annuity model in the roads segment and the resource pooling in power transmission has helped bankers gain a lot more confidence in these two sectors,” Sunil Srivastava, deputy managing director, State Bank of India Ltd. (SBI) told BloombergQuint over the phone.
Under the hybrid annuity model (HAM), the government contributes 40 percent of the project cost, to be drawn down in the early stages of construction. The remaining is contributed by the developer.
Another feature of this model is that government authorities shoulder the burden of getting key clearances like approval for land acquisition. Similarly, in the power transmission business, the PowerGrid Corporation of India Ltd.’s (PGCIL) resource pooling mechanism has helped improve the conditions under which transmission projects are being handled.
Under the pooling mechanism, PGCIL pools all the receivables from different power purchasing companies and pays out transmission companies proportionately. So, say if the designated size of a particular pool is Rs 100 crore and PGCIL has only been able to collect Rs 95 crore, then all the transmission companies expecting payments from that pool will get paid out 95 percent of what is due to them.
This ensures that no one project suffers suddenly due to a payment delay from one particular purchasing company. K Balasubramanian, group head- corporate banking at HDFC Bank, told BloombergQuint in a meeting last week that the transmission space should see a great deal of activity in the northern and north-eastern parts of the country as the government looks to increase availability of electricity.
“PGCIL has already issued a lot of job contracts to the likes of Reliance, the Adanis, KEC International, and Kalpataru. These companies have enough orders to tide them over for the next 12 months,” Balasubramanian said.
Kothari of Kotak Mahindra Bank added that the pooling mechanism is a “fill it, shut it and forget it” model, which allows companies to freely develop capacity without the fear of not being paid. The bankers added that the revival in transmission and highways will also bode well for allied sectors such as steel and cement.
HDFC Bank also expects to see demand arising from the aviation segment as the government looks to create new airports in smaller cities across the country. The government announced the launch of the UDAN scheme in March, where it aims to build a number of new regional airports and make air travel cheaper for the common Indian citizen.
“Another segment that will likely be interesting is the public sector. A lot of the public sector companies are sitting on a large amount of cash. The government is nudging these companies to either utilise their cash or pay it back in the form of dividends,” Balasubramanian said.
A Cautious Restart
While some banks, those that are not burdened with bad loans and have adequate capital, are back in the market, the lending remains selective and slow. This is evident from the lending data provided by the Reserve Bank of India (RBI) which slows a decline in outstanding loans to some of these segments.
Outstanding loans to the power sector as on 31 March 2017 stood at Rs 5.26 lakh crore, a drop of 9.4 percent from a year ago. Loans to the road sector grew by as meager 1.4% year-on-year to Rs 1.8 lakh crore in the same period. Infrastructure loans overall have shown a decline of 6 percent, with Rs 9.07 lakh crore in outstanding loans at the end of financial year 2016-17.
Analysts say that banks are being choosy and picking the safer parts of these sectors where execution risk is relatively low and government support is high.
“By virtue of having a low base, most private sector banks will see high growth rates in infrastructure lending. Moreover, they will try and stick to the better projects which are closer to completion or have everything in space,” said Karthik Srinivasan, senior vice president, ICRA Ltd. He added that without public sector banks in the game, infrastructure financing will continue to be a challenge.
Balasubramanian agrees that bankers are being selective so they don't repeat mistakes made during the previous cycle.
This time around, for instance, a large part of the decision on whether to lend or not is based on potential cash flows. "...Also, the companies that have remained standing can be viewed as more capable of handling the large projects. They are more conservative and cautious on expanding capacity," Balasubramanian said.
Kothari of Kotak Mahindra adds that the involvement of the government in these projects has ensured that only companies that are capable of executing the project themselves are awarded projects. Sub-contractors, who were a prominent part of the 2007-08 cycle, are now a rarity.
The Rate Advantage
Another factor working in favour of the restart of lending to infrastructure is the lower interest rate regime. Interest rates in India have been on the decline since the start of 2015 as inflation was slowly brought under control.
The RBI has brought down its benchmark repo rate from a high of 8 percent to 6.25 percent now. For well-rated companies, this has meant that borrowing rates are down to high single digits, as compared with 12-14 percent a decade ago.
This means that companies are incurring lower interest costs now, than they were before, improving their cost efficiency.
“With the benefit of having the most competitive lending rate, we will continue to be present in the infrastructure lending space. We like this space and we believe that good infrastructure needs to be funded wherever the opportunity arises,” Srivastava of SBI said.