A security guard stands outside a project office at a construction site for the Lucknow Metro developed by Lucknow Metro Rail Corp. and operated by Larsen & Toubro Ltd. in the Hazratganj area of Lucknow, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Scars Of Lending Past Continue To Hurt India’s Infrastructure Sector

The scars of the last credit cycle, where indiscriminate lending to infrastructure projects led to a surge in defaults, continue to haunt the economy. The poor track record in recovering infrastructure debt had led Indian lenders to tighten approval and appraisal processes and push up interest rates for such loans.

The risk aversion from lenders, together with the paucity of new infrastructure projects, has taken the share of infrastructure loans in total bank credit to a nine-year low.

Data from rating agency CRISIL and the Reserve Bank of India shows that loans to the infrastructure sector as a share of total bank credit has been declining for four financial years since 2014-15. In 2017-18, this fell to 11.5 percent. It slipped further this year to just under 10 percent based on outstanding credit data available till November.

Credit Pick-Up Driven By Refinancing?

On a year-on-year basis, though, bank credit to the infrastructure sector is up 8 percent in the first seven months of the current financial year. Credit available from infrastructure NBFCs has also picked up.

However, a senior executive with an infrastructure advisory firm, who spoke to BloombergQuint on condition of anonymity, cautioned about reading too much into this. Much of the credit being disbursed is for refinancing, asset re-monetisation, working capital and new projects in the odd well-performing sector like roads, this executive said. For new infrastructure projects, the availability of finance is down. Project financing has become tougher as lenders are being cautious and there has been a spike in the lending rates, he added.

Some legacy infrastructure lenders echo this sentiment.

Hemant Kanoria, Chairman and Managing Director, SREI Infrastructure Finance, told BloombergQuint that the company has not provided any financing for new projects over the last three to four years, given the many risks associated with infrastructure. Instead the company has provided structured finance solutions only for projects that are already operational or which need last-mile funding.

Until there is 100 per cent support for the project at various levels, it becomes very difficult to do project financing as both the developers and financiers can get into a problem. Unfortunately, regulations at different states have made things complicated. Most of the power plants are struggling because the interest costs are almost 30-50 per cent of the project cost, which makes it unfeasible.
Hemant Kanoria, Chairman and Managing Director, SREI Infrastructure Finance

Historically, most of the funding for under-construction projects came from public sector banks, said Sachin Gupta, Senior Director, CRISIL Ratings Ltd. But with most public sector banks still struggling for capital and some under a corrective action framework, lending by these institutions has also been constrained. For instance, IDBI Bank, an active lender to the infrastructure sector in the last cycle, has stopped large corporate lending all together. Among private banks, both ICICI Bank and Axis Bank, have previously said that they would be cautious in infrastructure lending.

Higher Rates, Tighter Monitoring

Even those who manage to get loan approvals are having to pay higher costs and deal with tougher monitoring processes.

Analysts that BloombergQuint spoke to say that over the past two to three years the spreads over government securities charged to infrastructure firms have risen by 100 to 150 basis points.

Gupta of CRISIL added that banks are also asking for more credit enhancements through corporate guarantees and ensuring that promoters have more skin in the game. In the end, all this adds to the implicit cost of financing a new project.

Kartik Srinivasan, senior vice president at ICRA Ltd said that lenders are structuring contracts in a manner that they have more of a say in the implementation and execution of projects. To reduce their own risk, lenders are ring-fencing cash-flows and asking that monies be parked in escrow accounts associated with a project.

Dinanath Dubhashi, chief executive officer at L&T Financial Holdings Ltd., explained that lenders are being far more granular in monitoring projects where they have given loans. Using a real estate project for illustration purpose, Dubhashi said in such a case not only is the lender monitoring implementation timelines, it is keeping an eye on factors like number of workers on site to capture any early signs of stress.

Lenders must spend more time and effort to monitor their projects,through robust risk management and early warning systems. Some of the fundamental risks for funding infrastructure projects have gone away as the government has taken care of major unmanageable risks. The only risks that are left for us to manage are the execution risks
Dinanath Dubhashi, Chief Executive Officer, L&T Financial Holdings Ltd

A Vicious Cycle

The tougher financing environment has meant delays in financial closure of projects and, in some cases, stalling of projects under implementation.

According to the Centre For Monitoring Indian Economy’s CAPEX database around 14.8 percent of the stalled projects face funding issues, whereas only 7.3 percent of projects are stalled due to land acquisition issues and 12.5 percent of projects are stalled due to lack of clearances.

This, in turn, adds to implementation delays and cost overruns, eventually hurting banks.

“Banks are having a tough time to recover their dues due to the delays in implementation. The cost overruns have increased as there is also some mismatch between the sanctioned cost of a project and the actual costs of executing it,” Ashish K Nainan, research analyst at CARE Ratings.

What will it take to break this vicious cycle?

The financial sector needs to see robust projects which have a balanced risk mechanism, said the executive from the infrastructure advisory firm quoted above. The government also needs to rebuild confidence within the financial community and developers in terms of contracts, payments and regulations, he added.