Implication of RBI Credit Policy on Infra
Infrastructure projects in the areas of power, oil and gas, railways, roads, ports, airports and telecommunications are largely characterized by high investments, high risk long gestation periods and generally having very domestic markets. These projects were at one time dependent on government’s financing support mainly because of the large volume of resources required and uncertain returns from the project and associated externalities. With the Indian economy growing at 8-9%, demand on infrastructure support is increasing at faster pace. Creation of infrastructure facilities requires huge resources.
In the past two decades central and state governments policy on infrastructure sector has changed gradually under the pressure of rising gaps between demand and supply of infrastructure and deteriorating quality of assets. Both central and state governments have made effort to facilitate the entry of private enterprise into these sectors through changes in the legal framework. A role for private sector participation has also been facilitated by technological change that allow unbundling of infrastructure, so that the public and the private sectors can take up the components most suited to their capacities and competencies. In addition to this central and state governments continued to invest significant sums in areas where private participation is minimal or not forthcoming.
Large infrastructure projects, its assets, its contracts, its inherent economics and its cash flows are segregated from its promoters or sponsors in order to permit a credit appraisal and loan to the project, independent of sponsors. The interest of private sector in joining in this type of government initiative and effort for providing amenities and facilities has evolved the concept of public private partnership – here a government service is funded and operated through a partnership of government and one or more private sector companies. These schemes are also referred to as PPP.
During the eleventh plan (2007-12) government envisaged an infrastructure investment of Rs20,56,150 crore (at 2006-07 prices) equaling US$514 billion to be shared between centre, states and private sectors in the ratio of 37.2%, 32.6% and 30.6%. Private sector is expected to bring Rs6,19,581 crore. Private sector, it was estimated to generate around 305 of the funding from internal accrual/equity financing. Total debt financing has been estimated Rs9,88,035 crore, to be raised from domestic bank credit, non bank financial companies, pension/insurance companies, external commercial borrowings etc.
What is heartening is that in all the three industries i.e. construction, housing and in infrastructure there is growth of credit over these period.
A key question now emerges in the context of RBI’s Annual Policy statement how infrastructure, construction and housing sector likely to have impact? Needless to mention RBI’s policy statement focuses on taming the inflation and discusses three specific issues of governments borrowing programmes, financial inclusion and infrastructure financing. RBI felt accommodative monetary policies in advance economies, coupled with better growth prospects in India there is likely to be large capital inflows into the country- which can pose challenge for exchange rate and monetary management. Since government of India is going to borrow a substantial portion of its fund requirement by the first half of the financial year, private sectors demand for fund is likely to push interest rates upwards. So far, interest rates have been affordable given the huge amount of liquidity available both from abroad and domestic sources. This is likely to create pressure on the cost of funds used in financing infrastructure, construction and housing projects. Corporate are unlikely to get impinged, especially when there is swing in activity but that is not so in case of new projects or developing projects. In the construction and housing segments, there is opportunity. The total urban land stock in India is only 2.3% of the country’s total geographical area, but houses 30% of the country’s population. Bankers see the opportunity, but they will be cautious in the light of the experience of last years meltdown. Equally investors have to learn to be more discerning – one should be more realistic on valuation expectations and should not throw caution to the wind.
With a view to meet the increasing finance needs for infrastructure sector, the Reserve Bank of India (RBI) in its annual policy for 2010-11 has proposed to reduce provisioning on infrastructure loan accounts classified as sub-standard to 15% from its current 20%. To avail of this benefit of lower provisioning, banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on such cash flows, it added. The RBI also proposed to allow banks to classify their investments in non-SLR bonds issued by companies engaged in infrastructure activities and having a minimum residual maturity of seven years under the held to maturity (HTM) category. Investment in non-SLR debt securities (both primary and secondary market) by banks where the security is proposed to be listed on the Exchange(s) may be considered as investment in listed security at the time of making investment, the RBI circular said.
Dr Ahindra Chakrabarti is the Professor of Finance and Management Accounting with International Management Institute, New Delhi.