DFIs can fill the vacuum left by banks and NBFCs in infra lending

A telling statistic in the recently released Financial Stability Report (FSR) suggests that banks may have to curtail their lending to infrastructure projects. Stressed advances to infrastructure account for 17.8 per cent of all loans to this sector (36.4 per cent of total credit to industry, the single largest category). In absolute sums, outstanding infrastructure credit would amount to over ₹12 lakh crore. In a recent speech, the Reserve Bank Governor said that in the context of “excessive exposure of banks to infrastructure projects...there is clearly a need for diversifying financing options” — such as promoting the corporate bond market, asset securitisation to deal with stressed assets and appropriate user charges. However, as the report of the task force on the proposed National Infrastructure Pipeline observes, the role of development finance institutions must be enhanced as well to fund a requirement of ₹111 lakh crore. In fact, DFIs accounted for about 23 per cent of the average annual infrastructure investments between fiscals 2013 and 2018, according to the report, with a high share going to the power and railways sectors — owing to the number of DFIs in that space. The DFI loan book expanded at a CAGR of 14 per cent between fiscals 2013 and 2018, while the infra credit of banks grew by a CAGR of just 2 per cent between 2014 and 2018, with feeble signs of a pick-up since then. With the FSR expecting a spike in NPAs to 14.7 per cent of gross advances by the end of this fiscal, banks would be well advised to reduce their exposures to a sector where returns can take time in coming. Except for India Infrastructure Finance Company (which will be provided equity support of ₹15,000 crore), the present DFIs are sector-specific.

DFI-driven project finance ran into disrepute on account of gross mismanagement and political interference in the pre-reform days. However, the wheel has come full circle, with universal banking not being able to fill the gap and take-out financing (converting medium-term bank loans into long-term ones, with a separate entity buying the former off the banks) somehow not working out. Meanwhile, infra NBFCs have run into rough weather, post the IL&FS meltdown. They need to address a host of governance issues. To ensure access to long-term finance, DFIs should be able to raise funds by issuing securities that can be classified as SLR. Their expertise in project finance must be developed, while giving them managerial autonomy.

The task force estimates that 83-85 per cent of the NIP requirement can be raised through Central and State budgets (18-20 per cent and 24-26 per cent, respectively), banks, NBFCs, equity, bonds and internal resources of PSUs. That leaves a gap for DFIs to fill, especially with market-based options looking fickle at present. An infra push now can turn the present crisis into an advantage.

COMMENT NOW