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Business News/ Opinion / Infrastructure funding: Fresh lease but old issues brushed under the carpet
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Infrastructure funding: Fresh lease but old issues brushed under the carpet

The renewed focus upon banks for funding infrastructure can be considered a tacit admission that other plans failed

Banks will now be allowed to lend to project developers, including affordable housing, for 25 years with an option to reset the cost of funds every five years. Photo: Pradeep Gaur/MintPremium
Banks will now be allowed to lend to project developers, including affordable housing, for 25 years with an option to reset the cost of funds every five years. Photo: Pradeep Gaur/Mint

There is a sense of déjà vu about infrastructure funding plans. Every few years, a new model arrives, then things don’t work out and another idea replaces the existing schemes. The latest additions include are the real estate investment trusts (Reits).

But the most significant development is the revision in the plans for banks to lend for infrastructure. Banks will now be allowed to lend to project developers, including affordable housing, for 25 years with an option to reset the cost of funds every five years. They can also raise long-term bonds for such financing, which will be exempt from cash reserve ratio (CRR), statutory liquidity ratio (SLR) requirements and priority loan norms.

At one level, the renewed focus upon banks for funding infrastructure can be considered a tacit admission that other plans failed. On another plane, the fresh risks this innovation may bring amidst a context of bad loan stress upon banks’ balance sheets raises disquiet. See, for instance, Tamal Bandyopadhyay’s column in Mint on 21 July in this regard.

These are not the only concerns. The broader context of a large debt overhang, with pricing and balance sheet adjustments not fully carried through, matters as much. When economic conditions turn adverse, the only way for firms to work out debt indigestion is to cut costs and prices for leaner and fitter balance sheets. This paves the way for fresh investments, transactions and sales. Signs of real consolidation gains by infrastructure and real estate firms are not so visible so far. Some are still unwinding assets to pare debt while serious readjustment effort eludes many others. That debt excess is far from purged is buttressed by an earlier revision of asset classification norms and reports that asset reconstruction companies may debut to bail out soured assets. But have property prices corrected in line with falling incomes? Are inventories piling up across cities? Are transactions volumes declining? Are developers not sitting on unsold homes without slashing prices?

The fundamental problems—inadequate profits, cash flows and returns due to low user paying capacity—that make infrastructure unattractive for private investors are brushed under the carpet as well. Is there a risk then that reversing the existing short versus long structure to match assets and liabilities could also result in future non-performing assets?

In the past, poor foresight and exuberance led to over-investment by private infrastructure firms. Competitiveness was severely undermined by sudden scaling-up of infrastructure investments, which pushed up costs. This was a perfect setting for lenders and borrowers to turn risk-averse and loans to turn sour. A slowdown was inevitable and that meant purging excesses. But a natural cycle, which restores both health and appetite of investors, is yet to run its full course. Fresh effort to stimulate investment via new funding arrangements doesn’t make much sense in this context. A publicly led, gradual pace of infrastructure investments might be better at this point, giving time for risks and returns to realign better in the meanwhile.

Renu Kohli is a New Delhi-based macro-economist.

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Published: 24 Jul 2014, 04:41 PM IST
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