 "funds")
Keeping pace with the upturn in economic activity, bank lending to the infrastructure sector rose 11.1 per cent year-on-year (YoY) in July.
While the trend looks durable, lenders and investors expect the growth to be gradual hereon depending on clear demand patterns to emerge and certainty in policies.
Rajkiran Rai G, managing director, National Bank for Financing Infrastructure and Development (NaBFID), the new government-owned financial institution that is expected to start business later this year, said banks have been talking about sanctioned credit pipeline, and disbursements have begun and are expected to be consistent. Generally, funds for infrastructure are disbursed over a period of one-two years.
Also looking at economic activity, it is clear that infrastructure investments are picking up — visible in the data on credit disbursal and road construction activity. It will only get better, Rai said.
According to Reserve Bank of India (RBI) data, combined lending in various segments of infrastructure rose by 11.1 per cent YoY to Rs 12.14 trillion in July, from 10.93 trillion a year ago.
The lending was flat (0.3 per cent) in the preceding 12 months, a period marked by economic and business disruptions due to the Covid-19 pandemic.
One trend aiding this is the healthy rise in capital expenditure by the Centre, which rose 62 per cent YoY in the April-July period, said Hetal Gandhi, director at CRISIL Research.
Advocating caution, Suneet K Maheshwari, managing partner, Udvik Infrastructure Advisors, said infrastructure finance will grow incrementally and not in a big way. New owners have come in for stressed assets like those in the power sector through the insolvency process, and the new capacities will also come on stream through brown-field expansion.
Are things different this time around?
Rai said banks have had to face a lot of challenges with respect to infra credit. They went through a bad cycle. But, there has been a lot of learning. They have tightened under-writing standards. Also, most projects that are receiving funds are de-risked. Earlier, land acquisition and environmental clearances used to be a challenge. Now, most projects that come up for sanctioning already have these approvals in place.
HDFC Securities said in a report that private sector capex is on the cusp of a pick-up, aided by the confluence of multiple enablers such as deleveraged corporate balance sheets and healthy profitability. A well-capitalised banking system, where the bad loan cycle has ended, with rising domestic demand and mid-cycle capacity utilisation, is making financing conducive, brokerage said.
Challenges ahead
The outlook is encouraging, given the huge scale of investments lined up across segments. To fortify this trend, bankers are looking for improvement in payment, especially on dues in the power sector, and prudence in litigation.
There is counterparty risk in power projects despite having mechanisms like power purchase agreements in place. The payments do not happen on time in the case of power utilities, said Samuel Joseph Jebaraj, deputy managing director, IDBI Bank.
Some of the broader challenges that have to be addressed include alignment between the central and state governments for projects and realignment of risk sharing for public-private partnership projects.
Addressing ineffective dispute resolution mechanisms, separating political conflicts from infrastructure projects and improving execution capability of private players also need attention, CRISIL said.
