While there’s a lot of hype about the rising activity in road construction, data from scheduled commercial banks (SCBs) suggests that banks are wary of funding the sector. The chart shows that advances outstanding by SCBs to roads contracted year-on-year in the months of May, June and July this year.
In fact, data shows that bank lending to roads has been steadily declining from the double-digit growth notched up in 2012. Banks must be wary of the sector after scores of road developers that were riding the uptrend in construction between 2010 and 2013 went belly up. Banks were left with huge non-performing assets as projects were stuck for want of clearances or funds.
However, what’s surprising is that the new and better Hybrid Annuity Model (HAM) that is being adopted for road tenders, where the government plays a significant role in the initial stage of the project, has not inspired SCBs to lend either. Perhaps financial closures have just been completed for HAM projects, and lending to the sector will pick up in the coming months. Or may be, the banks are not yet convinced about the viability of projects and promoters. Incidentally, the promoters have a lower equity participation and therefore exposure to the project under the HAM model. Has this made the bankers even more cautious?