India’s infrastructure story is witnessing its second coming and markets are already getting bullish with their bets on it. Stuck projects are finding financial completion and companies involved in building India’s roads, ports, airports, and rails are seeing an increase in their profit margins.
In 2022-23, new investment proposals grew by 36 percent to Rs 30 lakh crore. The fourth quarter witnessed an all-time high level of new investment proposals.
A big part of getting the infrastructure story right is to get its financing right. For India, infrastructure financing evokes a rather unpleasant memory of the previous cycle that was rife with overstretched budgets, mis-governance, bad debts, and finally the collapse of IL&FS that led to a crisis of confidence towards non-bank finance companies (NBFC). Between 2018 and 2020, the Indian economy lost its growth momentum owing to the drag from the over-leveraged infrastructure sector.
Ergo, it is understandable that a thread of unease towards infra financing continues to remain even today and perhaps is the reason why fund flows to infra haven’t matched the policy optimism demonstrated by the government and even the private sector in the previous year. That said, there are signs that bankers are taking a closer look at infra lending again, reflected partly by the string of infrastructure bonds issued by some lenders.
Banking on infra
When it comes to the biggest source of funding, banks and non-bank lenders, the story is mixed. Bank lending to the infrastructure sector has slowed in the past five months, data from the Reserve Bank of India (RBI) shows. Infrastructure credit grew a measly 1.4 percent year on year in May and shrunk in April. Bankers have indicated that they would exercise caution while lending to infrastructure this time. “Infrastructure, mainly roads and renewables are where the big demand is coming from, and the companies have a healthier balance sheet than before. The risk is low but there is still risk and these are long-tenure loans. It has to meet all our requirements and we have to be careful about pricing,” said an executive at a public sector bank requesting anonymity.
State Bank of India (SBI), the country’s largest lender that extends a big chunk of infra loans, is confident of credit growth but not in a hurry. “We have significantly strengthened our risk management and we are very mindful; we actually prescribe our risk limits for each industry, and we draw from our learnings from the industry what are the mitigants which are required to be put in place,” Khara said in SBI post-earnings analysts' interaction on May 18. In subsequent media interactions too, the SBI chief sounded cautious.
Bankers are willing to finance infrastructure projects but many are preferring to keep an arm’s length from risk by lending to NBFCs focused on infra. Also, lenders are proactively managing their liability side by opting to issue infrastructure bonds which will allow them to use specific pockets of funds towards infrastructure. Infra bonds are long-term liabilities for banks as against deposits that are usually short-term. In FY23, infra bond issuances by banks rose sharply and the volume is likely to remain upbeat this year as well.
Kotak Mahindra Bank Ltd, the most conservative of lenders and a bank that has avoided infra in the past, is ready to lend now and has floated an issue of infrastructure bonds for the same. The lender in its management commentary post earnings has indicated that it is willing to bite into the infrastructure sector by increasing the share of such loans from near zero to 5-7 percent.
The hesitance from lenders does not mean the infra sector will be starved of funds. Unlike in the previous cycle, newer sources of funds have cropped up and interest from long-term pension funds has increased.
New sources firing up
The National Bank for Financing Infrastructure and Development (NABFID) has been set up to exclusively focus on infrastructure projects. NABFID recently raised Rs 10,000 crore from the domestic bond market through a maiden issue, the proceeds of which will be used for lending. NABFID has a target of Rs 1 lakh crore for FY24 and has already disbursed Rs 15,000 crore and sanctioned another Rs 50,000 crore worth of loans.
Infra financing has got a boost with the introduction of alternative investment funds (AIF) such as Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). Though launched as early as 2014, these gained traction only years later, and in FY21 and FY22 the amount deployed grew manifold. For perspective, InvITs issuances amounted to a little over Rs 25,000 crore in FY21, a massive increase from Rs 2,000 crore the preceding year. This momentum is expected to continue in FY24 and already issuance of InvITs and REITs have totalled more than Rs 8,000 crore in the first two months itself.
Vimal Nadar, Head of Research at Colliers India pointed out that InvITs and REITs are still in the nascent stage but their performance is encouraging. “Total funds mobilised by REITs and InvITs during April-May 2024 have already surpassed the funding raised during the whole FY23, thus indicating that these alternative funding instruments are gaining scale and gaining larger ground,” he said. “The growth of REITs and InvITs will pave the way for increased retail participation in these Infrastructure and real estate projects in India.”
What these alternative sources also do is recycle capital by allowing developers to monetise their assets and move capital into other projects that need to be built from the ground up. “InvITs can essentially put money in an up-and-running project that generates cash flows. For a developer, this means refinancing existing debt and redirecting capital elsewhere,” said an analyst with a global rating agency requesting anonymity.
The infra-financing story is still a work in progress. Bankers are willing again to dip into long-term lending towards what can be called “nation-building”. Fortunately, lenders are finding ways to avoid past mistakes and better manage their asset-liability profile. Regulators too have introduced enabling instruments to help banks.
The cycle this time around may not necessarily end in pain. Even if it does, the bruises would be manageable and isolated.
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