The infrastructure sector has started receiving due attention from commercial banks once again after a prolonged period of credit deceleration. Although lending from this important source is not at the required level, it is nevertheless picking up pace. With the bubble of generous lending to infrastructure during 2008-12 now bursting and the ensuing large number of non-performing assets (NPAs) continuing to weigh down the system, banks are cherry-picking projects and companies. They are also auctioning sour loans to asset reconstruction companies (ARCs) and seeking resolution through a one-time settlement (OTS) due to delayed recovery under the Insolvency and Bankruptcy Code (IBC). The prescribed timeline for IBC resolution has been derailed by various stakeholders challenging the process in the courts. While the infusion of Rs 700 billion into the banking system by the apex bank is aimed at bringing liquidity into an otherwise slowing economy, in the long run, the infrastructure sector will gain with development finance institutions (DFIs) being reinstated and the role of insurance and pension funds enhanced in infrastructure financing.
Signs of revival in bank lending
As of 2018-19, bank lending to the infrastructure sector revived, exhibiting a significant year-on-year growth of 19 per cent. Deployment of gross bank credit to the sector stood at Rs 10.56 trillion as of March 2019 vis-à-vis Rs 8.91 trillion as of March 2018, as per Reserve Bank of India (RBI) data. Credit growth for infrastructure in 2018-19 was the highest in at least seven years both in absolute and percentage terms. Power, roads, telecom and other sectors witnessed
double-digit growth in bank lending. Since growth in the manufacturing sector is subdued, banks are willing to lend to healthy infrastructure companies/projects. There is visible growth in the affordable housing, telecommunications and renewable energy segments that is driving credit demand. The lending momentum continued in the ongoing fiscal year with outstanding loans of about Rs 10 trillion to infrastructure as of September 2019. Financial closures were aplenty in 2018-19, reflecting the revival of bank credit to infrastructure. Around 18 hybrid annuity model (HAM)-based road projects were able to tie up funding, of the 25 financial closures tracked by India Infrastructure Research. The financial closure of GVK’s Navi Mumbai international airport project was a notable one. Meanwhile, lending to renewable energy companies continued. In 2019-20 so far, nine projects achieved financial closure, including Phase II of the Kempegowda international airport and the Nagpur-Mumbai Super Communication Expressway. The initial euphoria with regard to HAM is fizzling out as the model has started showing cracks, thus making banks more cautious.
Stressed assets declining
The stressed advanced ratio in the infrastructure sector has been declining since March 2018, a positive indicator. The ratio, which stood at a high of 22.6 per cent in March 2018, gradually slid to 20.1 per cent in September 2018 and further to 17.8 per cent in March 2019. Meawhile, of the total credit to industry, the
share of credit to infrastructure increased from 33 per cent as of March 2018 to 37 per cent as of March 2019. These numbers not only point towards an improving financing landscape, but also highlight the fact that there is more responsible lending by banks unlike the irrational exuberance exhibited by them in the past.
Limitations of the IBC
Overall recovery under the IBC has improved, albeit slowly. The average recovery rate for 156 cases resolved until September 2019 was 42 per cent. The steel and cement sectors contribute three-fourths of the total debt resolved. Apart from these sectors, the recovery has been only 20-25 per cent. Limited recovery has been seen in infrastructure. Key sectors such as power and roads have largely remained outside the IBC. The decision-making process has been quite slow as litigants have also approached high courts and the Supreme Court for redress.
Adherence to resolution timelines is still a challenge. Of the 1,497 cases outstanding under the IBC as of September 2019, 36 per cent have been pending for more than 270 days. Over 50 per cent of the outstanding corporate insolvency resolution process (CIRP) cases are past 180 days. Beyond a point, such a delay leads to fatigue and diminishes the value of the asset. A significant difference will be seen only once some big-ticket assets are resolved. For large stressed infrastructure assets, there is a preference for the pre-IBC or OTS route. Moreover, outside the National Company Law Tribunal (NCLT), there is access to better quality of information for bidders which increases the likelihood of a successful outcome.
Sector-wise, power projects in the NCLT’s first list are expected to have a lower blended haircut of 55 per cent for the lenders because these projects were backed by adequate assets and steel companies experienced cyclical benefits. In the second list, however, recovery rates are grim and anticipated haircuts are higher for relatively smaller entities. There is little or no interest from buyers for most of the small- and medium-sized companies as these do not have a strong asset base or are difficult to revive. On a blended basis, haircuts for these cases range between 70 per cent and 80 per cent. Hence, banks are looking for a resolution through the non-NCLT route. Meanwhile, buyer interest is visible in stressed road assets, with banks expecting a recovery rate of 60 per cent in the case of the OTS route. Resolution of engineering, procurement and construction companies is preferred to be routed outside the NCLT because their value deteriorates significantly under this form of resolution and these companies are not backed by adequate assets. It is easy to sustain steel and power assets within the IBC as there is an underlying physical asset.
Outlook and the way forward
The IBC has been a major factor behind the improvement in India’s ease of doing business ranking which jumped from 142 in 2014 to 63 in 2019. Earlier, cases placed before debt recovery tribunals or the Board for Industrial and Financial Reconstruction were mired in the legal process for an average of seven-eight years. Now, barring a few large cases, over 90 per cent of the cases admitted to the NCLT have been closed within an average of 8-10 months. Banks are opting for the asset disposal route as some of the large accounts from the first list of the NCLT are yet to be resolved. Thus, they are looking to sell these assets to ARCs. To encourage them to clean some of the banks’ books, the 15:85 structure of cash to security receipts needs to be revisited. Given substantial litigation delays and fear of poor redemption of security receipts, banks have increasingly started insisting on all-cash deals, which ARCs find difficult.
With the steel sector witnessing cyclical benefits, all large steel cases are likely to be resolved in the coming year. Meanwhile, renewable projects with aggressive tariffs are likely to face pressure in the next three to four years and tariff wars in telecom could see the sector emerge as the next big defaulter. Going forward, a secondary market for stressed assets needs to be developed. With frauds in the banking sector surfacing and the resolution of stressed assets taking time, renewed emphasis on setting up of DFIs would be the way forward. China, South Korea and Malaysia still follow this model. Government-owned India Infrastructure Finance Company Limited remains one of the few DFIs. But, given the huge infrastructure investment requirement, its contribution is minuscule. Thus, more such DFIs should be encouraged to ease the burden of commercial banks as the onus of infrastructure financing does not completely lie with the latter.