The aim was to keep the banking sector safe from potent NPAs. Banks were robbed of safe lending opportunities in infrastructure.
Infrastructure building has been one of the top agendas of the Narendra Modi government. And if Modi returns to power for a third term, as is widely expected, he should set sight on the next-generation infrastructure building, which will be costlier than ever.
The density of expressways should see a quantum jump. Railway modernisation is in its early days. India deserves a network of freight (DFC) and high-speed rail corridors. Most important of all, Indian cities are ugly and inefficient. There should be a complete makeover of urban infrastructure.
Ideally, that should set the stage for private-public-partnership (PPP), which is a global choice for big-ticket infra-building. However, such options are limited to India in the absence of a long-term refinance ecosystem and regulatory framework. Together, they are crucial for finance risk mitigation.
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No Ecosystem
In 2019, the Reserve Bank of India (RBI) dismantled the refinance options in infrastructure and imposed strict non-performing asset (NPA) provisioning norms, thereby removing every prospect for extending the repayment period.
The problem was highlighted by Subhendu Moitra, founder-director of Coeus Advisors
at a podcast with this author.
Worldwide,
large infrastructure projects (like the $13 billion Mumbai-Ahmedabad high speed rail project) enjoy long concession periods. This is to keep the user charges low and negotiate the revenue-related uncertainties.
‘Concession’ indicates the period during which a build-own-transfer (BOT) project will remain under the control of the private investor, who in turn raises finance from the lending agencies.
The undersea Channel Tunnel between the UK and France has a concession period of 100 years. The project is yet to achieve its target for train passenger traffic.
Such uncertainties discourage financial institutions from taking long-term exposure to infrastructure. The problem is solved by refinancing options. Over the past three decades, nearly 200 lenders entered and/or exited the project.
India never had such an ecosystem. This is partly because India hadn't seen such policy emphasis on infra-building in the past. And, partly due to the "conservative" nature of the central bank.
Until a decade ago, Indian banks used to offer project finance for a maximum of 10 years. The concession period was mostly limited to 15 years. Together they created the perfect recipe for even quality infrastructure projects to turn NPAs.
The problem took a serious turn during the Manmohan Singh rule (2004-2014). The rush to build thermal power stations and award BOT projects in roads translated into piling up of NPAs in both state-owned and private banks.
Power plants were affected due to the coal crisis and the associated uncertainty over revenue generation. BOT highway projects became unviable due to implementation delays. The situation went to such a pass that banks stopped financing the infrastructure sector.
During his tenure as RBI governor (2013-2016), noted economist Raghuram Rajan tried to solve the structural end of the problem by introducing refinance solutions both for new and existing infra projects.
The 5/25 scheme, introduced in 2014, offered to refinance over 30 years to new projects. A separate scheme was introduced for refinance in existing projects, subject to rating of repayment capacity.
In a knee-jerk reaction after the IL&FS debacle in 2018, RBI scrapped refinance schemes. The aim was to keep the banking sector safe from potent NPAs. Banks were robbed of safe lending opportunities in infrastructure.
Only PSU Lending
Indian private banks have not returned to the infra space. Foreign banks were never there and they would not enter the scene till the ecosystem was in place. To let the juggernaut move, the Modi government resorted to a self-financing model.
BOT is replaced by the hybrid annuity model (HAM) on highways. PSU banks have been offering long-term
loans to government entities, like the National Highway Authority of India (NHAI), which monetises completed sections through Investment Trusts (InvIT).
This is a good model but not without limitations.
First, the infra space became heavily dependent on select state-owned lenders like the State Bank of India (SBI). If there is no fresh fund flow, these lenders have to block huge resources in long-term assets without an exit clause. That is risky.
Secondly, InvITs manage the risk by investing in many smaller projects. For large projects, there is no alternative to BOT. And, for big-ticket projects, we need foreign lenders.
Refinance is one option to make that happen. The other one is to create the regulatory framework. India has regulators in ports, airports and power; but not in road and rail.
A road or rail contractor should approach only the contracting authority for dispute settlement. How fair is that? Should any private lender, Indian or foreign, agree to finance in this space?
Highways minister
Nitin Gadkari tried to solve the problem by creating a committee of independent experts. But NHAI reserves the right to go to court if the award goes against it. That is insane.
