When the Modi sarkar came to power in May 2014, a stated priority was putting infrastructure back on its feet. The issues that commonly stalled projects were known. There were repeated problems with land acquisitions. Slow "green" clearances also held up all sorts of projects. High-cost financing made life difficult, since most infra projects are 70 per cent debt-financed and long-tenure. On top of that, there were sector-specific issues. Low rates made power and gas, loss-making propositions. Disputes from poorly written contracts often led to stalling, especially in public-private partnership (PPP) projects. Over-optimistic bidding in roads caused disaster.
It was felt a new government, led by a man with a proven record, could turn things around. Eight months down, the data indicates how deep and intractable those problems are. Financial year 2014-15 is into its last quarter. There was actually less in the way of financial activity in the infra space in the first nine months of 2014-15 than in the corresponding period of 2013-14. Given that 2013-14 was a slow financial year, matters have obviously not improved.
There is a consensus that the Centre is trying to institute change. It has instituted easier norms for financing via foreign direct investment (FDI) and indeed, FDI flows have improved. Also, processes for the so-called green clearances (forest and environmental) have been accelerated. The Reserve Bank of India (RBI) has been persuaded to allow banks to bypass prudential norms when raising long-term funds for infrastructure projects. The 2014-15 Budget mooted creating "pass through" lending structures, with tax benefits.
There have been key changes to the new land acquisition Act via ordinance. Essentially, consent is no longer an important factor when acquiring land for certain purposes. In theory, governments could get land as required. Those changes must also be ratified by Parliament. If acquisition does become easier, that could rescue some stalled projects. However, the new Act-cum-ordinance remains committed to paying higher compensation. That will alter financial viability in many cases.
There has been a stockmarket boom, triggered by the turnaround in sentiment after the Bharatiya Janata Party came to power. But while that has pushed up secondary values, it has not translated into major primary market activity. However, more money has been raised via qualified institutional placements (QIP).
On every other front, it seems financing activity is down. Domestic bank lending to infrastructure was Rs 47,500 crore between April-December 2014. This is down 27 per cent compared to the Rs 65,000 crore sanctioned in April-December 2013. Specialised institutions such as PFC, IDFC, IIFCL, REC, etc, disbursed Rs 24,000 crore between them in the same period of 2014, about 38 per cent less than that in 2013.
The ECBs raised in the infra space amounted to a little over $12 billion, about 12 per cent less than in the same period of 2013. Only six projects with a total cost of Rs 9,300 crore achieved financial closure in 2014-15 so far, versus 14 projects that cost Rs 60,000 crore achieving closure in April-December 2013. Even multilateral funding has dipped.
The caution is understandable. There is a massive overhang of stressed and non-performing assets (NPAs) across various sectors. Some are total writeoffs; in other cases, loan restructuring could lead to some recoveries. In a few cases, asset reconstruction companies might be buying those assets at deep discounts, in the hopes that they will eventually turn profits. Gross NPAs in the infrastructure space for public sector banks could amount to about five per cent of all advances. India Ratings & Research estimates stressed assets (NPAs plus restructured loans) could hit a frightening 14 per cent of all banking advances by March. The scheduled recapitalisation of the banking sector to meet Basel-III norms has already been delayed.
This has to remain a major focus area for the government, which must find ways to clear the log-jam. As of now, enormous sums are stuck in unproductive or stalled projects. Inevitably, many of those will have to be abandoned and the money invested written off. What can be rescued must be rescued. This will mean turmoil in the financial sector. After biting that bullet, the underlying issues will also have to be addressed.
One way or the other, the Centre (and state governments, which have a large role in many cases) must put infrastructure back on a firm footing. This has to be a thrust area in the Budget Session of Parliament, as well as being addressed in the Budget itself.
It was felt a new government, led by a man with a proven record, could turn things around. Eight months down, the data indicates how deep and intractable those problems are. Financial year 2014-15 is into its last quarter. There was actually less in the way of financial activity in the infra space in the first nine months of 2014-15 than in the corresponding period of 2013-14. Given that 2013-14 was a slow financial year, matters have obviously not improved.
There is a consensus that the Centre is trying to institute change. It has instituted easier norms for financing via foreign direct investment (FDI) and indeed, FDI flows have improved. Also, processes for the so-called green clearances (forest and environmental) have been accelerated. The Reserve Bank of India (RBI) has been persuaded to allow banks to bypass prudential norms when raising long-term funds for infrastructure projects. The 2014-15 Budget mooted creating "pass through" lending structures, with tax benefits.
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There has been a stockmarket boom, triggered by the turnaround in sentiment after the Bharatiya Janata Party came to power. But while that has pushed up secondary values, it has not translated into major primary market activity. However, more money has been raised via qualified institutional placements (QIP).
On every other front, it seems financing activity is down. Domestic bank lending to infrastructure was Rs 47,500 crore between April-December 2014. This is down 27 per cent compared to the Rs 65,000 crore sanctioned in April-December 2013. Specialised institutions such as PFC, IDFC, IIFCL, REC, etc, disbursed Rs 24,000 crore between them in the same period of 2014, about 38 per cent less than that in 2013.
The ECBs raised in the infra space amounted to a little over $12 billion, about 12 per cent less than in the same period of 2013. Only six projects with a total cost of Rs 9,300 crore achieved financial closure in 2014-15 so far, versus 14 projects that cost Rs 60,000 crore achieving closure in April-December 2013. Even multilateral funding has dipped.
The caution is understandable. There is a massive overhang of stressed and non-performing assets (NPAs) across various sectors. Some are total writeoffs; in other cases, loan restructuring could lead to some recoveries. In a few cases, asset reconstruction companies might be buying those assets at deep discounts, in the hopes that they will eventually turn profits. Gross NPAs in the infrastructure space for public sector banks could amount to about five per cent of all advances. India Ratings & Research estimates stressed assets (NPAs plus restructured loans) could hit a frightening 14 per cent of all banking advances by March. The scheduled recapitalisation of the banking sector to meet Basel-III norms has already been delayed.
This has to remain a major focus area for the government, which must find ways to clear the log-jam. As of now, enormous sums are stuck in unproductive or stalled projects. Inevitably, many of those will have to be abandoned and the money invested written off. What can be rescued must be rescued. This will mean turmoil in the financial sector. After biting that bullet, the underlying issues will also have to be addressed.
One way or the other, the Centre (and state governments, which have a large role in many cases) must put infrastructure back on a firm footing. This has to be a thrust area in the Budget Session of Parliament, as well as being addressed in the Budget itself.