RBI's Infra funding norms can revive infra sector

Continuing with their proposals announced in the budget, the government has released financial guidelines to achieve their infrastructure and affordable housing goal.

The Reserve Bank of India, in order to pump in liquidity into infrastructure funding said banks would not have to maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR), nor would they have to meet priority sector lending targets for funds raised through bonds for extending credit to infrastructure sector. Similar benefits have been extended to affordable housing projects.

 

By announcing the financing package, government has set the ball rolling for infrastructure projects. Stalled road projects worth Rs 1.8 lakh crore can now possibly see the light of the day with the combined efforts of the government and the RBI. 
 

Banks had stopped lending money to infrastructure projects as they were stuck for procedural delays.

An Economic Times report quotes the transport minister Nitin Gadkari as saying that apart from finance there were four main reasons for delays in road projects in the previous government's tenure.

Land acquisition, forest and environmental clearances, defence land tracts on highway alignments and delays in clearances for rail over-bridges from the railways were the main cause of delays which prevented projects from taking off. 

 

Work order for projects were given by the previous government without even acquiring 10 per cent of the land required or the necessary environmental clearances. Banks on their part extended loans on the basis of work orders given to the companies.

But as clearances could not be availed, projects started to get delayed. Banks finally withdrew their financial sanctions, but those that did give loans for the project saw it getting stuck and finally turning toxic. Gadkari says that currently there are only 4-5 developers in the country who are not in the CDR (corporate debt restructuring) or in the NPA list. 

 

Given this background, the measures announced by RBI can revive the sector. Already Gadkari in co-ordination with other ministries have cleared Rs 40,000 crore of projects. Government is also talking to countries having low interest rate to participate in India’s infrastructure development. They plan to raise Rs 1 lakh crore from external funding. 

 

As far as the current proposal is concerned, it not only gives banks to review infrastructure funding but also incentivises them to do so. Rather than locking funds in CRR/SLR banks can now earn higher returns by lending in these projects. Vinayak Chatterjee, Chairman of Feedback Infrastructure explained in an article in Business Standard that the funding mechanism will be path breaking in resetting of the commercial bank’s interface with infrastructure lending.

Chatterjee explains that infrastructure loans can now be readied for design for 25 years with five year resets. This makes such loans far easier to service by infra developers and clears the root cause of artificially compressed seven to 10 years loans becoming non-performing assets since they are out of sync with 20-30 year concession periods and the economic life cycle of the projects. It simultaneously addresses the asset-liability mismatch concerns of the banking system.

 

Gadkari in the Economic Times report has been quoted as saying that infra projects in today’s environment can only become viable if they get low-cost funds, since construction costs have gone up while traffic revenues have dipped. 

 

Commenting on the development Alpesh Mehta and Sohail Halai of Motilal Oswal say that the development is positive for banks as concentrated efforts are put to resolve structural issue of infrastructure sector. Not only will the development be positive for banks, it can help revive the economy.

Gadkari hopes to add two per cent to the GDP over the next two years through development in highways and ports sector. He is planning to clear the residual Rs 1.4 lakh crore project backlog by August 15, 2014 and is creating a shelf of road projects worth Rs 2-3 lakh crore for which it would initiated work on obtaining green clearances and land along with detailed project reports, so that they can be bid out as the sector revives.

 

This is just the road sector that we are talking off that can gain from debottlenecking and creative thinking by the central bank. Impact on affordable housing and other section of infrastructure can be much higher, enough to kick start the economy.