Infrastructure loans emerge as banks’ biggest stress point
As of 31 March, infrastructure accounted for 21% of all loans banks recast in the last fiscal year under the CDR mechanism
Mumbai: The asset quality of bank loans to infrastructure developers is deteriorating at a faster pace than that of loans advanced to any other sector, underlining the challenge the next government will face in reviving investment and kick-starting stalled projects.
As of 31 March, banks had restructured ₹ 50,239 crore of loans they had given to the infrastructure sector—21% of all loans they recast in the last fiscal year under the so-called corporate debt restructuring (CDR) mechanism.
Restructured loans to public works projects swelled from ₹ 21,912 crore (9.57% of the total) in the previous year and ₹ 16,774 crore (11.14%) in the year before that.
Total loans restructured by banks via CDR, on a cumulative basis, rose to ₹ 3.3 trillion as of 31 March, from ₹ 2.3 trillion a year ago. Worryingly, the figure does not reflect the total amount of restructured loans in the banking system because banks also recast loans on a bilateral basis outside the CDR platform.
A slump in economic growth to the slowest pace in a decade, coupled with delayed project approvals such as environment and forest clearances, problems in land acquisition and high borrowing costs have hit developers of long-gestation and capital-intensive infrastructure projects particularly hard.
Economic growth slumped to 4.5% in the fiscal year ended 31 March 2013 and is estimated by the Reserve Bank of India (RBI) at below 5% in the year just gone by. With their cash flows crimped by stalled projects, developers have had to take recourse to CDR, which typically means a longer repayment period and lower interest costs.
Banks are now hoping that the new government that emerges from the April-May general election will speed up clearances for troubled projects, and that RBI will allow a longer repayment period for infrastructure projects.
Typically, infrastructure loans are given for a period of 5-7 years, but bankers said many projects take longer to get commissioned, after securing the approvals, and generate cash flows.
“Banks have restructured infrastructure loans with the hope that policy actions will be corrected. If that doesn’t happen, a serious problem can emerge," said Sushil Muhnot, chairman and managing director of state-run Bank of Maharashtra.
What Muhnot is referring to is the risk of restructured loans turning bad, impairing bank balance sheets further and crimping their ability to lend.
Experts warn of more pain emerging from the segment before the worst is over. About 40% of total infrastructure loans are likely to be restructured by March 2015 as against 20% in March 2013, rating agency India Ratings and Research Pvt. Ltd said in a recent report.
“Everyone contributed to the current mess," said Vishwas Udgirkar, senior director at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.
“There was reckless lending by banks in the infrastructure segment without seeing the merits of the projects, probably due to the competition. Things were fine till 2012 but started deteriorating after that due to a slowing economy and clearance delays."
“The stress in the infrastructure segment today is a serious issue, which requires a more prudent approach from financial institutions, while funding infrastructure projects and the willingness from the government to clear projects fast." Udgirkar said.
Funding constraints
The deteriorating asset quality of infrastructure loans also highlights the constraints India faces in filling an estimated $1 trillion funding gap for building roads, ports and power projects in the 12th five-year plan (2012-17).
Unlike in developed markets, where long-term investors such as pension funds are active participants in infrastructure funding, in India the burden mostly falls on the commercial banks.
In recent times, conglomerates like the Tata group, the Aditya Birla Group, the Piramal Group and Larsen and Toubro Ltd have initiated investments in the infrastructure sector, either directly or through infrastructure debt funds, but such ventures can only help partly, given the huge funding requirements.
Banks are struggling to meet this demand because most of their deposits are short-term, while infrastructure projects are typically long-gestation in nature, resulting in asset-liability mismatches.
“Financing of infrastructure projects, if not designed efficiently, tends to force a payback period on the companies. The pricing and repayment period should be designed based on the nature of the segment," said Ananda Bhoumik, a senior director at India Ratings and Research Pvt. Ltd.
Bhoumik says that despite the long-term nature of infrastructure projects and their ability to generate cash flows, banks are often under pressure to seek speedy repayments to avoid asset-liability mismatches. Pricing of infra loans should be more flexible, he says.
Any improvement ultimately depends on a revival in growth, bankers say.
“There is nothing much a bank or a company could do in such a situation. There needs to a good revival in the economy and the will to clear roadblocks for projects," said a senior banker with a leading government-owned bank.
Besides hampering banks’ ability to fund infrastructure projects further, the rising stress in loans to the segment could lead to a larger problem in the banking sector, necessitating special measures from the regulators, bankers warn.
“There could be some areas where the RBI could elongate the repayment period of infrastructure loans such as the one for roads and power, where it takes more time for the projects to make money than the loan repayment period," said the banker cited above.
For banks, the rising pile of restructured loans means having to set aside more money to cover the risk of default.
Under RBI norms, banks need to set aside 5% of the loan value when they restructure a new loan as against 0.4% provisioning required for a standard loan. Banks typically prefer to recast loans because if the loan turns bad, the provisioning requirement shoots up manifold. Provisioning for bad loans can go up to anywhere between 25% to 100% of loan value, depending on the nature of the asset.
There is no accurate estimate of the bad loans of banks in the infrastructure segment.
More pain ahead
As of 21 February, Indian banks had loans outstanding of ₹ 8 trillion to the infrastructure sector, up from ₹ 7.3 trillion a year ago.
“The pain is likely to continue for sometime," said Saikiran Pulavarthi, analyst at Espirito Santo Securities India Ltd, referring to the possibility of more loans to the infrastructure segment coming up for a recast by creditors.
Some large loans recasts have taken place in recent months as the economy struggled.
In March, a group of 22 banks led by State Bank of India cleared the recast of ₹ 10,000 crore in loans advanced to India’s largest private ship builder, ABG Shipyard Ltd.
In July 2013, banks approved a ₹ 13,500 crore CDR package for Gammon India Ltd, offering the engineering and construction company a breather from a crisis brought on by slower growth and project delays.
On Tuesday, Mint reported that four big port projects of Essar Ports Ltd are stuck because of delayed regulatory approvals and litigation. The company has so far invested ₹ 2,500 crore in these four projects over the past five years, but revenue will be delayed beyond this financial year, when they had been originally expected to kick in, the report said. To be sure, Essar Ports hasn’t sought a loan recast yet.
Delays in granting mandatory project approvals have been blamed by critics on a perceived ‘policy paralysis’ at the centre as the ruling Congress-led United Progressive Alliance battled corruption scandals and charges of mismanaging the economy during its second term in power.
The government acted by forming the Cabinet Committee on Investment (CCI) in January 2013 to fast-track project clearances. CCI had “unblocked" 99 big projects worth ₹ 3.5 trillion, finance minister P. Chidambaram said on 14 November.
Analysts say stress in the infrastructure sector becomes evident only when projects overshoot their timelines. Under banking norms, an infrastructure loan is classified as standard until the deadline for its commissioning. That delays detection of potential stress till such time as the deadline is missed.
“The problem (stress) was already there. It is manifesting only now as more projects fail to commission," said Vaibhav Agrawal, vice-president of research at Angel Broking Ltd. “If there is no resolution to this problem, banks will have to take a huge hit on their books."
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