Will banks pose a problem for India's infra growth?
In this issue:
» Reforms for banking sector on the cards
» Will a special fund for start-ups work?
» Does a rise in CV sales signal an uptick for the economy?
» Is the US as corrupt as developing economies?
» ...and more!
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As we wrote in a recent edition, the Budget's thrust on infrastructure funding is the only hope for reviving the otherwise moribund sector. One such proposal was the 5:25 financing for infrastructure projects. This would allow banks to lend to a developer for 25 years with the option to rewrite the terms of the loan and possibly even transfer it to another entity's balance sheet after 5 years. Of course, infrastructure companies have welcomed this move. Most banks and infrastructure finance companies were offering loans of tenure upto 12-15 years. Thus, given that infrastructure projects are quite long term in nature, the 5:25 structure bodes well for a sector which needs funds to execute projects.
Not surprisingly, banks are not too happy with this. One of the reasons why there is not much comfort for high tenure loans is the issue of asset liability mismatch. More importantly, banks are worried and quite rightly so of the possible rise in bad assets or restructuring of assets. Indeed, quite a few loans to the infrastructure space have gone bad, especially the ones where the projects have stalled. Indeed, as per an article in the Mint, as of March 31, 2014, infrastructure loans worth Rs 572 bn were under corporate debt restructuring (CDR). This accounted for around 20% of all loans to all sectors.
So what is the solution? One of the things that the government intends to do is reduce the CRR and SLR requirements so that banks have more funds at their disposal. But that does not address the crux of the problem. The issue here is the probability of loans going bad. And the chances of this will reduce if projects are executed on time and there are no serious hurdles which would stall them. So far, many projects have been stuck because of issues relating to land acquisition, lack of environmental and other governmental clearances. Not to mention, the lack of fuel for power plants. And this has become a vicious cycle because delays have automatically raised the cost of these projects leaving the developers cash strapped and banks facing the spectre of a rise in bad loans.
If the rampant red tapism is done away with in the first place with a focus on speedy clearance process, there is no reason why projects would not be implemented on schedule. And once that starts to happen and the cash flows become more regular, banks would be willing to lend for a longer duration if so required.
All in all, the government and the RBI will have to work in tandem to strike the right balance and ensure that there are no more hurdles in ramping up infrastructure, as this is critical in ensuring a sustained high GDP growth for the country in the longer term.
What do you think the government needs to do to ramp up infrastructure growth in the country? Let us know in the Equitymaster Club or share your comments below.
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However, allocating money is the easy part. The real challenge would come at the time of execution. And unfortunately there's hardly any clarity on this. Entrepreneurs are of the view that the fund should at least have a five year horizon as one has to be patient with new businesses. Besides, the fund needs to be managed by people with expertise across different fields like industry, bureaucracy and also venture capital. Another point worth considering is that an overwhelming majority of start-ups fail within the first three years itself. Therefore, the Government should be willing to live with this kind of risk. In short, getting this project off the ground is certainly not going to be easy.
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A mix of factors led to the same. Firstly, there would be the low base effect. As you would be aware, CV sales declined sharply for two years straight, something that the industry has not witnessed in decades. The second key factor is the rising freight rates (as reported by the Business Standard) which are up by about 12% to 15% in the past six months. Thirdly is the extension of excise concessions; lastly is the overall improvement in sentiments. Given the focus on picking up infrastructure and mining activity by the new government, the CV industry will be a key beneficiary of the same. Having said that, one should not forget about the surge in stock prices of CV manufacturers; a broad based recovery seems to be priced in.
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For China, it happened to be real estate since it was a developing country. Massive credit flow led to construction boom. However, with urbanization having peaked, now there is an oversupply in the real estate market. Suffice to say with affordability becoming an issue, Chinese urbanization dream has turned into a ghostly nightmare. With property developers offering discounts to offload inventory there is a worry that if the stock pile does not get liquidated, the banking industry could come under stress. This is because quite understandably, it has been financing property transactions. Even manufacturing and services sector growth could be hit as both are closely tied to real estate. There is no denying the fact that China went into an overdrive and overinvested in infrastructure and real estate. This has led to a massive bubble brewing in the economy we reckon.
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5 Responses to "Will banks pose a problem for India's infra growth?"
George
Jul 15, 2014If India want to be on the forefront among the emerging economies and majority of Middle-class Indians are now ready to undergo reforms even at the cost of any eventuality whatsoever, structural changes and modifications in in infrastructure is prime and vital important. Any layman can understand with the present infrastructural system we would not reach anywhere!
Baskar
Jul 15, 2014Whether infra loan, car loan, personal loan add the spouse or any female house hold closely related to the borrower like wife, sister or mother as a co-borrower.In case of default the female co borrower will be more sensitive to police case or court case. 95% of the loan can be recovered due to the presessure of female counter part to the male borrower to repay the loan by hook or crook
ck.lakshmynarayanan
Jul 15, 2014I entirely agree with you that infrastructure is the backbone of any economy. This is particularly so for India to develop this sector faster as it can give a boost to other sectors in the long run.
At the sane time, there should be a full proof mechanism to monitor utilization of funds allocated by banks.
Ajay
Jul 15, 2014Is red tape the only problem plaguing infrastructure sector? What about rampant corruption with corporate sector being hand-in-glove with the babus or vice-versa?
hoshang dehnugara
Jul 16, 2014govt has to do infra dev on its own and not to disturb nat banks, reasons stated by you are absolutely correct. i find the whole of your right up correct. like bjp, in our country and shiv sens in maharashtra developed road/ flyover projects.