BS Infra Summit: How lending trends in 2010s created bad loan crisis

The paper notes that the problem was not just weak lending choices; core project risks were built into the model

Addressing structural issues in infrastructure financing will ensure sustainable, long-term economic growth, according to a new working paper by the Centre for Social and Economic Progress (CSEP). 

The study, ‘Non-Performing Assets in Indian Banking in the 2010s: The Role of Infrastructure and Public-Private Partnerships’, traced how the boom in bank-led financing of infrastructure projects — especially through public-private partnerships (PPPs) — created massive non-performing assets (NPAs) in public sector banks (PSBs). 

Gross NPAs in commercial banks surged from 2.5 per cent in 2010-2011 to 11.2 per cent in 2017-2018, with PSBs faring worse at 14.6 per cent. Nearly half of all corporate defaults resolved under the Insolvency and Bankruptcy Code came from the infra sector. 

The lending surge stemmed from government programmes to push private participation in roads, power and telecom. PSBs responded aggressively, “disproportionately lending to the infrastructure sector compared to private banks.” 

The paper noted that the problem was not just weak lending choices; core project risks were built into the model. “Several structural challenges make infrastructure projects inherently risky.” Power projects suffered from overestimated demand, 

coal supply disruptions, and financially fragile distribution companies. 

Looking ahead, the paper recommends deepening the corporate bond market and encouraging institutional investors such as pension and insurance funds to finance infrastructure. PPP contracts must be redesigned with better risk-sharing mechanisms and flexible structures for unforeseen shocks. Governance reforms in PSBs, particularly aligning lending incentives with project performance rather than loan disbursement targets, are also critical. 

The paper underlined the need to strengthen specialised financial institutions like the National Bank for Financing Infrastructure and Development and the India Infrastructure Finance Company Ltd. 

“Addressing the structural issues in infrastructure financing will not only reduce NPAs in banks but also ensure sustainable long-term economic growth.”