Project finance on its last legs in India
It’s no coincidence that every financial institution that attempted project lending has come to grief
The last bastions of long-term project financing in India seem to be crumbling. ICICI Bank recently decided to quietly shutter its project finance division. Public sector banks who have accounted for the bulk of industrial lending in recent years may not overtly say it, but they too have been withdrawing from long-term industrial loans to focus on shorter-term retail and working capital loans. After all, it was the project lending binge during the boom years of 2003 to 2010 that left them with their current burden of non-performing loans, that have proved a dead weight on their balance sheets.
Even with the new Bankruptcy Code in place, seizing control of and liquidating those assets is proving a Herculean task. The proximate reason that banks cite for their retreat from project lending is the lack of demand, given the stalled capex cycle. But even if demand picks up, it is very doubtful if banks will return to this business. It is certainly no coincidence that every financial institution in India that has attempted to focus on project lending in the past has come to grief. After pouring subsidised government funds into unviable steel, textile and engineering projects in the pre-liberalisation era, development finance institutions IFCI, ICICI and IDBI had to pivot to other forms of lending to survive. IDFC and IL&FS, which stepped in to fund the later telecom, power and airport projects, have come a cropper too with the former splintering and the latter collapsing. Of late, questions are even being raised about the sustainability of sovereign-backed entities such as NHAI that have drawn on unlimited credit lines to fund the infrastructure buildout.
These failures essentially underline structural problems that bedevil long-term project financiers in India. One, given the dearth of long-term funding sources from a rudimentary bond market, project lenders need to constantly battle asset-liability mismatches that leave their balance sheets highly vulnerable to turbulence. Two, lenders across the spectrum have displayed poor appraisal skills in their complete inability to assess project cash flows over a complete cycle. Three, the parlous state of corporate governance has led to widespread gold-plating of project costs that masks funds diversion by promoters, sometimes in collusion with lending officials. Finally, the scams, collusion and rent-seeking have triggered over-the-top judicial interventions, leading to a logjam in land acquisition, natural resource allocation and pricing, halting even legitimate projects in their tracks.
These are in fact the reasons why any renewed attempt to re-start the project lending cycle in India must address these imponderables, instead of reinventing the erstwhile development finance institutions in new avatars. Project financiers, to succeed in India, will need access to long-term funds from a deep bond market, specialist project appraisal skills relevant to their specific sectors and concerted government effort to clear the logjams in getting the projects off the ground, while being required to conduct stringent on-ground checks on the end-use of funds.