Project loans revive from multi-year lows in FY24, infra leads the capex flavor

Infrastructure projects continue to be the primary focus for bank funding

The Reserve Bank of India's (RBI) recent report on project loans to the private sector by banks and financial institutions highlights some notable trends. Fresh loan sanctions, which represent new loan approvals, have increased to about 3 percent of total loans in FY24, up from 2 percent in FY23. Although these figures are still well below the peak levels observed during FY08-10, they reflect a gradual recovery in long-term lending, according to a recent note by analysts at Kotak Institutional Equities.

Infrastructure projects, especially in the power sector and road and bridge construction, continue to be the primary focus for bank funding. In FY24, infrastructure accounted for around 55 percent of total sanctions, a trend consistent with previous years from FY17 to FY23. Among the states, Maharashtra and Gujarat have been the largest recipients of these private sector project loans, with Andhra Pradesh and Karnataka also showing significant improvements in attracting such investments.

Despite these positive trends, the current levels of loan sanctions are modest compared to the peak of the last corporate investment cycle in FY10-11, when annual sanctions were around Rs 4 lakh crore. While there are signs of a recovery in capex-driven loans, the data does not yet indicate a strong resurgence.

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This restrained growth is partly due to a shift in the composition of loan portfolios. The share of loans to the corporate sector is now only half of what it was during the last investment cycle. Lenders are increasingly diversifying their portfolios, moving away from consumption-driven sectors like personal loans and focusing more on micro, small, and medium enterprises (MSMEs) and retail sectors.

Although corporate India's balance sheets are relatively healthy, there is little evidence to suggest that leverage levels will rise significantly, particularly given the caution stemming from the previous non-performing loan (NPL) cycle. Regulatory developments, such as the Insolvency and Bankruptcy Code (IBC) and the Central Repository of Information on Large Credits (CRILC), are likely to keep both lenders and borrowers vigilant about avoiding excessive leverage.

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