Revision of lending norms imperative for growth of Infra sector
The infrastructure sector of India has been in troubled waters for some time. However, the crisis has deepened now with banks facing an uphill task to recover loans granted to the sector. Many state-owned banks today are in a dilemma with regard to the crisis related to Non-performing assets (NPA) that has resulted from the infrastructure boom of the previous decade.
Major jolt to banking system:
The crisis that is looming large has resulted in a major jolt to the banking system and thereby to the fiscal balance sheet. This has dented the long-term prospects of the Indian economy as it grapples to escape a stagflationary situation. The infrastructure sector was looked upon to resurrect the Indian economy from the inflationary spree as well as to boost growth. However, all such hopes were trashed as the sector got entangled in a debt spiral.
Issues faced by infra projects:
In the past few years many projects got delayed due to land acquisition issues as well as issues related to securing environment and forest clearances. However, the crisis cannot be attributed to these factors alone. Many projects seemed unviable from the very onset and took an eternity to get off the block. Many public-private partnership (PPP) projects were in limbo as the private players engaged with such projects sought to cash in on the loopholes in such projects, thereby benefitting themeslves in the process.
Nexus between banks and major infra firms:
Many state-owned banks have had a hand-in-glove role to play with major infra firms in the concentration of impaired assets, that has compounded India’s debt woes. These banks have had to deal with the ordeal of bad loans due to compulsions from the government to lend loans to their favoured groups. Due to the absence of quality checks undertaken by these banks, large-scale capital misappropriations were caused.
Corporate bond markets a likely solution:
The infra sector, if it has to succeed in the next decade will have to dig its heels deep by finding an efficient financing model. There could be issues of asset-liability mismatches due to bank lending towards long gestation projects. Part of the solution to this problem could lie in developing deep corporate bond markets. However, such markets can be successful only if there are sufficient buyers in the insurance and pension industry. Besides, it is essential that the government borrowing is reduced drastically.
Diverse banking models suggested to resolve impasse:
Another resolution to this impasse that has been suggested is to introduce diverse banking models in the country, with one model focusing exclusively on the infrastructure sector. It is important that the regulatory requirements of such banks are carefully considered due to the inherent risks that the banking sector is associated with, besides the possibilities of regulatory arbitrage. It is also essential that lenders to large infra firms set aside a higher capital that what is normally provided. It is also significant to revise infra lending norms whereby there are more stringent lending norms for providing bank credit to the infra sector.