Bank credit still remains the largest source of funding for the infrastructure sector, though it has declined in recent years due to the stressed position of bank balance sheets and the large number of NPAs in infrastructure. Multilateral funding has also been muted. However, there has been a pickup in alternative sources of funding. Primary markets have revived and funding via the PE route has expanded considerably. FDI has also increased. However, there has been a slowdown in ECB activity as domestic rates have trended lower, making forex borrowings less attractive. It’s noteworthy that two infrastructure investment trusts were listed this year. The bond market also saw a lot of activity in the private placement space.
There are encouraging signs that new funding sources could develop. The National Investment and Infrastructure Fund closed its first deal while the Asian Infrastructure Investment Bank and the New Development Bank did some deals too.
The emphasis on cleaning up bad loans has lent momentum to the market for stressed assets. Many infrastructure companies are also deleveraging their balance sheets. The other area of focus is the renewables segment, which is still attracting strong interest. Mergers and consolidation across sectors have also taken place, forced by the unsustainable levels of debt.
The infrastructure sector continues to be plagued by a high concentration of stressed assets. The telecom sector is in deep trouble and the power sector still remains under pressure. However, asset reconstruction companies are getting into the act. The new Insolvency and Bankruptcy Code may help resolve bad debt situations quicker, but lenders will have to accept deep haircuts. Given that the government is working out a recapitalisation plan, banks might be more prepared to do this.
The bond market is a natural alternative source of funds. Indeed, there have been encouraging moves in that both masala bonds and green bonds have found takers. But there are some serious barriers. High and non-uniform stamp duty is one. Another is the lack of secondary market liquidity. A third problem is the rating barrier which keeps out pension funds.
The investment climate in the country is still weak. But there are encouraging signals. Apart from the expectations of economic growth recovery, once the bank recapitalisation plan goes through, funding should improve across the sector. Meanwhile it’s up to policymakers to find ways to remove barriers to the bond market and to continue to push for the fast resolution of NPAs.