The private sector is constrained by lack of project funding from banks, which are struggling with deposit growth, and this has led to challenges in private capital expenditure and, in turn, on employment, said Rashesh Shah, Chairman, Edelweiss group.
“Access to project finance debt has become a big issue because banks are not comfortable lending, outside of a few large corporates. It is lack of access to project finance which is hampering some of the capex,” Shah told businessline in an interview.
He pointed out that banks were struggling with deposit growth, an issue that was also recently flagged by the Reserve Bank of India governor. “The problem is that bank deposits are not growing,” Shah said, adding that he hoped that the Budget would have some proposals to encourage bank deposits.
Edited excerpts:
Private capital expenditure has not picked up and this is an area of concern since most of the heavy lifting in capex is being done by the government. Why do you think private capex is not picking up?
Private capex needs both equity and debt, especially project finance. Now access to debt is only to some large corporates. Everybody gets working capital debt, but if I want to put up a three-million-tonne steel plant or a new cement plant or build a road, then the access to project finance debt has become a big issue as banks are not very comfortable lending outside of a few corporates. So, it is the access to project finance debt on a larger scale, which is hampering some of the capex and risk taking. Equity markets are at all-time high, it is readily available, and people are able to raise equity, but debt is getting difficult.
But why can’t companies access the overseas bond markets as some large corporates are doing?
That access is very restricted to maybe the top-10 or -15 corporates, but you want at least 200-300 companies having access to project finance debt. It’s not just the large corporates who have capex requirements, but smaller companies putting up half-a-million-tonne cement plant or a steel rolling mill also require funds.
Outside of bank debt, they can access the domestic bond markets, and then the overseas market and at each stage the funnel becomes narrower. One of the big problems is that bank deposits are not growing. So we have this very strange what I call single-barrel economy where equity markets are firing and credit markets — whether it is deposit or anything which is credit-linked, bank deposits — availability of debt has been slowing down. If you think about it, equity markets are about optimism. There is a lot of optimism, but the debt market is about cash flow, conservatism and that is what is holding everything back. So we need to really reform the debt markets …hopefully in this Budget, there is something to incentivise deposits.
What are you looking for in the Budget?
This Budget is going to be an important one because it’s the first Budget of the third NDA government, and in a way it’s an opening innings on a five-year term. I am looking for some policy announcements and some kind of guidance on where the next five years are going to be, the economic focus of the government. There should be something for consumption. The easiest way to boost consumption is to reduce tax at the lower levels. There should be something for capex, which can be via depreciation or some other tax incentives or to make project finance a lot more available.
I hope they do something for housing because housing can be one replacement for capex. I think even interest rebate on housing loans, or some kind of relief will help the housing sector.
A lot of the funding for project finance can come from insurance sector, so encouraging insurance sector to get into more project finance, because to only depend on bank finance for project funding, especially when bank deposits are not growing .. well you need long-term funds.
There should be some policy relief for MSMEs, because they are also struggling and at least some incentives for credit to flow to them.