Thursday, February 2, 2017

Infrastructure Financing in India – Huge opportunity or terrible threat?

Figures from India always make me feel dizzy:

  • Since 2001, total bank lending to the Indian infrastructure has increased 103x, which represents a compound annual growth rate of 39 %.
  • Over the next 3 years, the Indian Government wants to invest 377 BUSD in infrastructure such as the development of industrial clusters and the construction of roads, railway, and ports.
  • In total, the Indian infrastructure sector needs 455 BUSD investment over the next five years, with 70 % of funds needed for power, roads, and urban infrastructure.

So what are frustrated bankers (those who don’t work in regulation or compliance and have the miserable task of generating business) waiting for? Perhaps they are waiting for a better track record for Indian infrastructure assets:

  • 8 % of total advances to the infrastructure sector are non-performing assets.
  • Non-performing infrastructure assets account for 13 % of non-performing assets of the Indian banking sector.
  • Gross non-performing infrastructure assets have almost doubled between March 2015 and March 2016 (from 400 billion rupee to 800 billion rupee).

Besides the doubtful track record, Indian infrastructure financing also accumulates some features that make bankers (this time those working in risk departments) nervous: Projects are long-term and complex. Bankers are often accused of making things complex, but here, one should actually not blame them:

  • Infrastructure projects always involve many parties and, as you can experience in any business meeting, with each participant, time and complexity increase exponentially.
  • Projects often comprise natural monopolies, for example highways and water supply.
  • Because construction and operation take a long time, projects are often subject to changing policies, change orders, delays, etc.
  • The longer the financing tenor, the more difficult the asset liability transformation becomes for a bank.

So how can India boost infrastructure financing? Some key measures include the following:

  • Banks can issue guarantees in favor of other banks financing infrastructure projects if they keep a 5 % stake of the project cost. However, a general separation of credit risk and funding is not allowed.
  • In general, the equity contribution from the project’s developers should come from their own resources. But exceptions are possible if the project company is already existing and operating.
  • Repayment schedules for infrastructure loans are flexible as long as they are aligned with the project’s cash flows.
  • Funds raised by banks through issuing infrastructure bonds are exempt from priority sector lending requirements as well as reserve requirements.
  • Up to a specific percentage (such as 50 %), banks are allowed to provide credit enhancement for infrastructure bond issuances.
  • To the extend the debt of a PPP project is assured by the project authority through a concession, the debt can be considered, from the banks’ perspective, secured.
  • Project cash flows can lower banks’ provisioning with regard to bank debt as long as they flow through appropriate escrow accounts which ensure that the bank has a clear and first legal claim on the cash flows.

So, huge opportunity or terrible threat? As always, probably both is true. No risk, no return. After all, this has always been true!


Shri N. S. Vishwanathan / Reserve Bank of India – Issues in Infrastructure Financing in India – November 15, 2016