Funding for infrastructure development in India primarily depends on banks, non-banking financial companies and the budgetary support of the government. Given the prominence of the infrastructure sector in shaping India’s economic growth, financial institutions consider it a priority sector and display a strong willingness to sanction loans for the purpose of asset creation. For instance, the State Bank of India sanctioned approximately Rs 800 billion in 2022-23 for infrastructure projects. Further, they are planning to infuse funds to the tune of Rs 1 trillion in 2023-24.
Lenders tend to exhibit a predisposed inclination towards extending loans to traditional sectors that benefit from well-established and favourable policies, such as the road and power sectors. More participation is required for sunrise sectors such as green hydrogen. In line with this, Power Finance Corporation (PFC) Limited, a primary lender to the power sector, has broadened its funding scope to include multiple sector projects. It has financed projects across various sectors, such as the Machilipatnam and Ramayapatnam ports in Andhra Pradesh, the Mumbai metro, airports in Vizag, Goa and Delhi, and the Ganga Expressway, among others. In addition, PFC Limited has sanctioned several healthcare projects, including NIMS Hospital in Andhra Pradesh. It further utilises its in-house technical experience to devise solutions that maximise recovery for borrowers as well as lenders. Moreover, as an “AAA” lender, backed by the Government of India, its cost of borrowing is exceptionally low. As a result of this, the recovery rate in PFC’s stressed assets is one of the highest among lenders.
Shift in dynamics
Lenders’ viewpoint has undergone a shift in the past decade or so. During 2007-15, non-performing assets (NPAs) were the highest in the infrastructure sector. Around that period, model concession agreements (MCAs) were still developing across sectors, regulators were in their infancy, many projects were being awarded on cost-plus basis, land acquisition was a major problem and construction began prior to obtaining all necessary approvals, which were later revoked after achieving financial closures.
As of 2023, MCAs have undergone revisions in multiple sectors, resulting in a more pragmatic approach, regulatory bodies have developed greater expertise and autonomy, and projects are being awarded through competitive bidding. Due to these advancements, the risk perception among lenders has decreased. Additionally, NPAs have reduced to around 3 per cent in 2023 from 10-25 per cent in 2007.
Previously, banks relied on debt recovery tribunals and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. The landscape shifted significantly with the introduction of the Insolvency Bank Code (IBC) in 2016, which has been a game changer. In addition, over time, the investor base has also widened with the entry of pension funds, sovereign wealth funds, venture capital and multilateral-backed companies.
Furthermore, previously time-consuming clearance processes and intricate tax structures have been replaced by a more streamlined single-window clearance system and the implementation of the goods and services tax.
Lenders’ perspective on infrastructure funding has gradually shifted towards a positive stance. Moreover, over the past three to four years, an improved risk perception among lenders has led to lower premiums and interest rates, resulting in enhanced project viability.
Borrower expectations
In recent times, there has been an increase in the level of expectation from borrowers. The previously issued terms and conditions had a significantly greater rate of acceptance despite being very stringent. Now, borrowers have become increasingly aware of the intricacies involved in infrastructure projects. As a result, they have become more demanding, making it challenging to conduct business. Previously, borrowers considered and evaluated only the financial aspect of the agreement. They are now cognisant of their preferences and have more factors to consider, such as interest rates, loan tenor and security components.
Borrowers are now motivated by sponsors such as private equity players rather than specific promoters. They request clear commercial conditions to be outlined in the loan agreement, specifying control terms and the extent to which they can engage financial advisers and lawyers. They are also exercising prudence in formulating precise concepts regarding the ownership structure they will engage with.
Lender comeback
In response to borrowers’ demands, lenders have recently placed greater importance on covenants, in contrast to the past when they were not given due consideration or even enforced. In addition to this, banks are implementing stricter monitoring measures. Previously, banks provided loans to borrowers simply for project implementation. Currently, similar to borrowers, lenders also exhibit heightened sensitivity towards the terms and conditions. They adhere to covenants specifying detailed criteria, including the requirement for the land to be prepared beforehand and the machinery to be already delivered.
Banks deal with all types of stressed assets. As a result, they possess a deep understanding and are capable of proactively identifying risks. To facilitate this, they have developed early indication systems for the timely detection of risk assets. Prior to this, stressed assets were mostly addressed through asset reconstruction companies such as National Asset Reconstruction Company Limited. These “bad banks” have helped alleviate stressed assets in the infrastructure sector.
Lenders are also placing a strong emphasis on execution capabilities and want all dependencies on promoter group firms and other entities to be clearly specified in legally binding agreements, such as supply arrangements or offtake arrangements. Additionally, lenders consider it crucial to include appropriate substitute rights that are applicable in the event of enforcement. However, these circumstances are highly distinctive and specific to the sector.
Key recommendations
According to industry experts, a quicker stressed asset resolution through IBC – National Company Law Tribunal is recommended, given that the average time taken for resolution is around 650 days, with an average recovery of 32 per cent. A simplified and time-bound process with minimal adjournments is required, along with the expedited admission of cases.
The formulation of concession agreements should involve extensive consultations with a broad range of stakeholders. Additionally, tax-free bonds, zero coupon bonds, etc., should be introduced for the non-banking sector, which lacks access to cheaper current account savings accounts deposits.
Based on a panel discussion among Madan Biyani, Chief Financial Officer, J. Kumar Infraprojects Limited; Anurag Dwivedi, Partner, Shardul Amarchand & Mangaldas; Rajiv Ranjan Jha, Director (Projects), Power Finance Corporation; Rajesh Kumar, General Manager PF&S SBU, State Bank of India; Soumitra Majumdar, Partner, JSA; and Santosh Sankaradasan, Executive Vice President, Project Advisory & Structured Finance, SBI Capital Markets, at a recent India Infrastructure conference.
