Sharp decline in bank loans to infrastructure sector
Data from the Reserve Bank of India (RBI) on bank lending to the infrastructure sector shows a sharp contraction over the last two years. This is at a time when the government is going all out to create fresh capacity in infrastructure, be it roads, railways, telecom or irrigation.
From 12.8% year-on-year in January 2014, growth rate in bank loans to the sector as a whole has fallen steadily. By 2015, the growth rate was trickling down to single digits. And, since April, loans to the sector as a whole started contracting.
The biggest contraction was seen in the power sector (-10.4%), followed by telecom (-6.3%). The fact that there is surplus thermal capacity with plants operating at around 60-65% capacity utilization is a reason why even new power generation projects are not on the cards. If at all, renewables is the new buzzword in the power sector. Meanwhile, transmission and distribution projects are being awarded by the government, but these are less capital-intensive.
Roads remain the only appealing sector for bank lending. But here too, the growth rate became marginally negative last November after topping the charts two years ago.
This is certainly not good news. Budgetary support for capital expenditure too hasn’t seen much growth this fiscal year.
However, more recently, banks have been saddled with stressed assets in the infrastructure segment, which has perhaps killed their appetite for further lending.
The infrastructure sector is riddled with problems from land acquisition to project delays and cost overruns. Economic viability over the life of these projects is also hard to assess with various risks that crop up.
A white paper released by Crisil Ltd and Assocham in November estimates Rs43 trillion is needed over the next five years to fund the country’s ambitious infrastructure plans. Given the issues of asset-liability mismatches and group exposure regulations of RBI, banks may not be able to meet the needs of the infrastructure sector in the near term.