Infrastructure lending is high growth area

Infrastructure lending is high growth area
The Hindu Business Line, January, 11, 2010, Page 3

K. Ram Kumar Priya Nair

Infrastructure lending has emerged as a high growth area for Indian banks in the current financial year amidst the overall slack in credit growth.

At a time when India is showing the ‘promise' of achieving a 7.0-7.5 per cent GDP growth when advanced economies are trying hard to come out of recession, it is a no-brainer that only infrastructure – mainly power, roads, ports, airports, and oil rigs – build-up can ensure continued socio-economic development on sustainable basis.

Notwithstanding the fact that they face serious asset-liability mismatches and get little support by way of tax concessions (despite making innumerable representations to the Finance Ministry in the last few years), banks have risen to the challenge of financing infrastructure projects.

As per the latest available Reserve Bank of India data, year-on-year (as on August 28, 2009), banks clocked a robust 44.7 per cent growth in credit to the infrastructure sector (or Rs 93,647 crore in absolute terms) as compared with 36.1 per cent growth (or Rs 55,533 crore) .

Overall, the year-on-year credit growth as on August 28, 2009 was subdued at 13.3 per cent (or Rs 3,08,718 crore) as compared with 26.5 per cent (or Rs 4,84,805 crore) as on August 29, 2008.

Given that infrastructure project developers are showing robust appetite for credit, bankers are laying much store by this segment of borrowers to grow their balance sheets.

They are hoping that in the coming few quarters, drawals will begin from their ‘healthy' loan sanctions pipeline, which currently is estimated to run into a few thousand crore rupees for each bank.

In the context of the Prime Minister's latest statement at the Pravasi Bharatiya Divas 2010 function in Delhi late last week that the country will return to a 9-10 per cent growth trajectory in the next couple of years, bankers feel that it is imperative that the Government as well as the Reserve Bank of India put in place enabling measures that will encourage infrastructure lending.

Enabling measures

What are the enabling measures that the banks are seeking?

Banks have moved the Finance Ministry seeking the benefit of tax deduction in respect of income received from financing infrastructure projects via introduction of a new section (Section 80LB) in the Income-Tax Act, 1961.

They want 100-per-cent tax deduction on income earned from infrastructure financing for five consecutive years beginning with assessment year 2011-12 and 50 per cent deduction for the subsequent five consecutive assessment years. “If tax deduction is allowed, then banks will be more enthusiastic about lending to infrastructure projects. As our post-tax yield will be higher, we will be in a position to charge project developers lower interest rates,” said a senior official of a public sector bank.

According to the Indian Banks' Association, the primary constraints for banks in financing infrastructure projects arise from their funding structure and applicable liquidity ratios (cash reserve ratio and statutory liquidity ratio).

While banks' resources are mainly in the form of deposits, which are typically of maturities up to three years, infrastructure projects require long-term financing i.e. for tenures extending beyond 15 years.

Apart from asset-liability mismatch, interest rate risk and pricing are also key issues. “With regard to infrastructure lending, there is an overall asset-liability mismatch because funds are required for 14-15 years, but deposits are of shorter maturity. Today, all banks are supporting infrastructure lending. But going ahead, individual sectoral gaps could arise. Whether we can meet sectoral requirements is a big question,” said Mr M.D. Mallya, Chairman and Managing Director, Bank of Baroda.

Take-out financing

Bankers are hoping that ‘take-out' financing, which has been a long time coming, takes off this time round.

Take-out financing, which was mooted over a decade ago by IDFC and State Bank of India, is a mechanism designed to enable banks to avoid asset-liability maturity mismatches that could arise out of extending long-term loans to infrastructure projects.

Under this mechanism, banks financing infrastructure projects enter into an arrangement with a financial institution to transfer, say after seven years, to the latter the outstanding on their books.Given the multiplier effects of infrastructure projects, the time may be ripe for the Government and the RBI to make small concessions to banks so that 9-10 per cent growth envisaged by the Prime Minister in the coming few years can become a reality.