December 2018

The past few months have been challenging for the infrastructure sector as financiers have faced multiple issues. While inflation remained under control, banks suffering from a combination of toxic loans and poor liquidity remained very cautious about offering loans. In addition, the IL&FS crisis caused tremors across the entire non-banking financial company (NBFC) sector, further affecting lender confidence. Meanwhile, volatility in global crude prices affected the rupee and led to a slowdown in external commercial borrowings.

However, infrastructure finance grew despite these challenges. There was a gradual pickup in bank lending and government-owned NBFCs found resources to continue supporting the infrastructure sector. Multilateral agencies maintained their commitments. There was strong activity across the private equity (PE) space and the green bond market continued to grow. There were a series of IPOs as well, and there could be many more of these in the medium term.

The relatively new channels of investment trusts and infrastructure debt funds continued to increase activity. Many sovereign wealth funds, pension funds and PE players are also buying stressed assets, particularly in the power and road sectors. This is helping developers deleverage stressed balance sheets. The implementation of the Insolvency and Bankruptcy Code [IBC], 2016, has certainly led to a change in sentiment with respect to stressed assets. Cash-strapped promoters are now willing to voluntarily place assets on the block rather than face the prospect of IBC action.

There remains a great deal of untapped potential in the domestic bond market. The lack of secondary market activity remains a deterrent to funding through this route. Foreign direct investment (FDI) could also be a larger source of funding – easier FDI norms in construction, aviation, railways, etc., have already boosted investor confidence but more needs to be done on the policy front. Pension and insurance funds also contribute far less than their potential. Again, policy reviews and appropriate changes may be required to encourage greater participation.

It will be crucial to continue to attract external funds in order to supplement internal resources and help bridge the growing gap in financing. Foreign inflows hinge on a host of factors, including domestic interest rates, international rates, policy reforms, India’s macroeconomic growth rates, and the global climate for investment. Much of this is outside the control of the Indian government but it must do what it can to give overseas financiers confidence in policy continuity.

The past few years have seen a series of defaults and delinquencies in the power, road and telecom sectors and many projects have been stalled. This has led to understandable caution on the part of lenders. Policymakers have to review these cases and address the root causes. Besides this, they must ensure a swift and permanent resolution of the problems that have repeatedly beset the banking and NBFC sectors, to set infrastructure financing on a firm footing. Dealing with such issues on an ad hoc basis just leads to crises every few years and that is not good for the long-term health of the sector.


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