The Non-Performing Administration
Source: By K.C Chakrabarty: The Financial Express
There has been no dearth of policy pronouncements and re-engineering of processes aimed at improvement in the investment climate for infrastructure projects. However, there seems to be little headway insofar as achievement on ground is concerned. Let me highlight some disconcerting facts: Out of 576 SEZs that have received formal approval, only 172 are operational.
Against a target of awarding road projects aggregating 50,621 kms during 2008-13, only 10,690 kms have been awarded. Many of the projects awarded have yet to see commencement of work due to problems in achieving financial closure, delays in land acquisition and obtaining environmental clearances.
Out of 16 Ultra Mega Power Projects planned, contracts for only 4 were awarded. Out of this only one has become operational and another is nearing completion and that too much beyond the scheduled dates. Even the one project that has commenced operations is running much below capacity. Lack of clarity on coal import, forest clearances and land acquisition delays are creating impediments.
Under the New Exploration and Licensing Policy for exploration of crude oil and natural gas, of the 251 blocks allotted, 110 have reported discoveries but only 6 are actually operational.
Having set the backdrop, let me begin by responding to an issue which has been made out to be a very crucial challenge in so far as financing of infrastructure projects go. Has bank finance been a constraining factor for infrastructure development?
It is pertinent to note that outside of budgetary support, which accounts for about 45% of the total infrastructure spending, commercial banks are the second largest source of finance for infrastructure (about 24%). Historically, contrary to popular perception, it is the commercial, more particularly, the public sector banks that have supported the infrastructure requirements of a growing Indian economy. It is worth highlighting that outstanding bank credit to the infrastructure sector, which stood at R72.43 billion in 1999-2000, has increased steadily to R7,860.45 billion in 2012-13, a compounded annual growth rate (CAGR) of 43.41% over the last thirteen years against an overall CAGR of bank finance to all industries at 20.38% during the same period. This apart, credit has also flown into infrastructure sector via NBFCs, mutual funds and capital markets, the source of bulk of which is bank finance. It may not, therefore, be correct to argue that lack of finance from banks has constrained the development of the infrastructure sector.
Banks have been substantially financing infrastructure projects in the country notwithstanding the inadequate commercialisation of projects due to regulatory, political and legal constraints and total absence or insufficiency of user charges in many sectors. Of course, this has not been without a fair share of pain for them. The NPAs and the restructured assets in this segment have increased quite substantially of late. There is enough evidence to suggest that a substantial portion of the rise in impaired assets in the sector is attributable to non-adherence to the basic appraisal standards by the banks.
The need of the hour for the central government, state governments and the project developers is to ensure that the minor impediments that ail the operationalisation of these assets are immediately removed so that they can be put to productive use and start generating revenues. Meanwhile, the banks must draw appropriate lessons from the past failures and be very discerning with the credit appraisal of the projects that come up for their consideration.
While there have been some requests for a separate asset classification regimen for infrastructure projects, I do not see any merit in these arguments. The evidence suggests that the higher NPA in the sector is not an industry wide issue, it is rather bank specific. For the umpteenth time, I reiterate that the reason for NPA is non-performing administration. In the case of infrastructure, this could also be on account of non-performance beyond that of the bank management—that of policy makers, bureaucracy, etc. But what is really puzzling is why this affects the public sector banks the most. The answer lies squarely in the poor project appraisal techniques, lack of accountability, post–disbursal supervision, etc. In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information-based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!
More than half of the bank credit to infrastructure goes to the power sector. Notwithstanding some deceleration in recent years, bank credit to the sector has been growing at a rate higher than overall bank credit to infrastructure. Power projects today are stalled not because of lack of credit but because of lack of supply of fuel and uncertainties with regard to coal pricing and power tariffs, towards which the government has recently taken some measures. After power, banks have the most exposure to roads, where projects are stuck because of delays in land acquisition, environment and forest clearances. The sector which has seen the maximum dip in bank credit within infrastructure is telecom, particularly since January 2012 when the 2G licenses were cancelled. Thus, credit moderation to infrastructure sector is a consequence of sector-specific issues/bottlenecks.
There is no dearth of finance for infrastructure development and, especially, for commercially viable projects. However, concomitantly, it is important that banks in general and public sector banks in particular, shift to an information-based project appraisal system so as to ensure that the precious funds are not stuck in unproductive projects. Some other issues like creating a mechanism for recovery of the cost through appropriate pricing regime, simplification of project clearance by a centralised authority, etc. need to be worked upon on a priority basis.
Given the long term nature of infrastructure financing, which is beyond the normal 5-8 year loan tenors of commercial banks, and the decreasing scope for incremental financing by banks, there may be a case for relaxing norms for pension/insurance/provident funds so that they can fill in some of the gap in debt financing. But nothing will work if the general sentiment with regard to progress of infrastructure projects remains bleak. Until and unless economic activity revives and various roadblocks to infra-projects get cleared, sentiment is likely to remain subdued for the sector, making its financing, whether from banks or non-banks, equally difficult. It is in this context that the role of SBI Caps, which acts as an intermediary between the project developers and the finance, is very critical.
There has been no dearth of policy pronouncements and re-engineering of processes aimed at improvement in the investment climate for infrastructure projects. However, there seems to be little headway insofar as achievement on ground is concerned. Let me highlight some disconcerting facts: Out of 576 SEZs that have received formal approval, only 172 are operational.
Against a target of awarding road projects aggregating 50,621 kms during 2008-13, only 10,690 kms have been awarded. Many of the projects awarded have yet to see commencement of work due to problems in achieving financial closure, delays in land acquisition and obtaining environmental clearances.
Out of 16 Ultra Mega Power Projects planned, contracts for only 4 were awarded. Out of this only one has become operational and another is nearing completion and that too much beyond the scheduled dates. Even the one project that has commenced operations is running much below capacity. Lack of clarity on coal import, forest clearances and land acquisition delays are creating impediments.
Under the New Exploration and Licensing Policy for exploration of crude oil and natural gas, of the 251 blocks allotted, 110 have reported discoveries but only 6 are actually operational.
Having set the backdrop, let me begin by responding to an issue which has been made out to be a very crucial challenge in so far as financing of infrastructure projects go. Has bank finance been a constraining factor for infrastructure development?
It is pertinent to note that outside of budgetary support, which accounts for about 45% of the total infrastructure spending, commercial banks are the second largest source of finance for infrastructure (about 24%). Historically, contrary to popular perception, it is the commercial, more particularly, the public sector banks that have supported the infrastructure requirements of a growing Indian economy. It is worth highlighting that outstanding bank credit to the infrastructure sector, which stood at R72.43 billion in 1999-2000, has increased steadily to R7,860.45 billion in 2012-13, a compounded annual growth rate (CAGR) of 43.41% over the last thirteen years against an overall CAGR of bank finance to all industries at 20.38% during the same period. This apart, credit has also flown into infrastructure sector via NBFCs, mutual funds and capital markets, the source of bulk of which is bank finance. It may not, therefore, be correct to argue that lack of finance from banks has constrained the development of the infrastructure sector.
Banks have been substantially financing infrastructure projects in the country notwithstanding the inadequate commercialisation of projects due to regulatory, political and legal constraints and total absence or insufficiency of user charges in many sectors. Of course, this has not been without a fair share of pain for them. The NPAs and the restructured assets in this segment have increased quite substantially of late. There is enough evidence to suggest that a substantial portion of the rise in impaired assets in the sector is attributable to non-adherence to the basic appraisal standards by the banks.
The need of the hour for the central government, state governments and the project developers is to ensure that the minor impediments that ail the operationalisation of these assets are immediately removed so that they can be put to productive use and start generating revenues. Meanwhile, the banks must draw appropriate lessons from the past failures and be very discerning with the credit appraisal of the projects that come up for their consideration.
While there have been some requests for a separate asset classification regimen for infrastructure projects, I do not see any merit in these arguments. The evidence suggests that the higher NPA in the sector is not an industry wide issue, it is rather bank specific. For the umpteenth time, I reiterate that the reason for NPA is non-performing administration. In the case of infrastructure, this could also be on account of non-performance beyond that of the bank management—that of policy makers, bureaucracy, etc. But what is really puzzling is why this affects the public sector banks the most. The answer lies squarely in the poor project appraisal techniques, lack of accountability, post–disbursal supervision, etc. In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information-based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!
More than half of the bank credit to infrastructure goes to the power sector. Notwithstanding some deceleration in recent years, bank credit to the sector has been growing at a rate higher than overall bank credit to infrastructure. Power projects today are stalled not because of lack of credit but because of lack of supply of fuel and uncertainties with regard to coal pricing and power tariffs, towards which the government has recently taken some measures. After power, banks have the most exposure to roads, where projects are stuck because of delays in land acquisition, environment and forest clearances. The sector which has seen the maximum dip in bank credit within infrastructure is telecom, particularly since January 2012 when the 2G licenses were cancelled. Thus, credit moderation to infrastructure sector is a consequence of sector-specific issues/bottlenecks.
There is no dearth of finance for infrastructure development and, especially, for commercially viable projects. However, concomitantly, it is important that banks in general and public sector banks in particular, shift to an information-based project appraisal system so as to ensure that the precious funds are not stuck in unproductive projects. Some other issues like creating a mechanism for recovery of the cost through appropriate pricing regime, simplification of project clearance by a centralised authority, etc. need to be worked upon on a priority basis.
Given the long term nature of infrastructure financing, which is beyond the normal 5-8 year loan tenors of commercial banks, and the decreasing scope for incremental financing by banks, there may be a case for relaxing norms for pension/insurance/provident funds so that they can fill in some of the gap in debt financing. But nothing will work if the general sentiment with regard to progress of infrastructure projects remains bleak. Until and unless economic activity revives and various roadblocks to infra-projects get cleared, sentiment is likely to remain subdued for the sector, making its financing, whether from banks or non-banks, equally difficult. It is in this context that the role of SBI Caps, which acts as an intermediary between the project developers and the finance, is very critical.
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