According to RBI’s Financial Stability Report of December 2018, system-wide gross non-performing assets of banks, which stood at 11.2 per cent in FY18, is expected to touch 10.3 per cent by FY19. While NPAs slide gradually, the gross deployment of credit has reported a growth of 12.2 per cent during FY19, as compared with 8.2 per cent last year. While this is good news, the cause of concern is that it comes in the backdrop of an offtake in the infrastructure sector which was primarily responsible for the widespread NPAs in the first place.
In FY18, the share of NPAs in the infrastructure sector had touched 22.6 per cent, from 16.7 per cent in FY17. Stressed assets in the infrastructure sector had touched a high of 32.6 per cent in 2016, from just 4.7 per cent in 2009.
Recent data from the RBI shows that credit deployment in the infrastructure sector has grown considerably at 8 per cent in FY19, against (-) 1.7 per cent in FY18. Within the infrastructure sector, more than half of the disbursement has been to the power sector, which has been saddled with stressed assets.
Deployment to the infrastructure sector exhibited a significant year-on-year growth of 19 per cent, as compared to the overall 12 per cent growth in overall credit off-take during the fourth quarter of FY19 ( for quarter on quarter figures see table ).. This credit surge is possibly not the best thing to have happened in the given banking environment.
Alternative approach
Lending to the infrastructure sector is like a double-edged sword. While the sector by and large has been at the core of the NPA menace, it is also true that the sector is in dire need of funds. According to Economic Survey 2017-18, India will require investments of about $4.5 trillion by 2040 to develop infrastructure to aid economic growth. The current trend shows that India can meet around $3.9 trillion infrastructure investment out of the required $4.5 trillion.
Given the long term nature of such investments, any miscalculation or change in economic fortunes will lead to asset-liability mismatches for commercial banks, pushing them into the pit, as has been the case in recent times.
There are a couple of alternatives that can be explored with renewed vigour. Issuing infrastructure bonds which could be subscribed by institutional investors, insurance firms, pension funds, amongst others, is one such alternative. It may be noted that while the domestic debt market in India amounts to about 67 per cent of GDP, the size of India’s corporate bond market is just 17 per cent of GDP, compared with 45 per cent in Malaysia and 74 per cent in South Korea.
Infrastructure financing is fraught with higher credit and market risks due to the longer investment tenures, and hence becomes unsuitable for commercial banks, which are into medium-term financing. The expertise for such long-term financing lies more with development finance institutions (DFIs). Initially, low-cost funds were made available to DFIs to ensure that the spread on their lending operations does not come under pressure. However, the withdrawal of such funds put the onus on DFIs not only to raise resources at competitive rates but also compete with commercial entities while lending.
Over the last few decades, many of the DFIs converted to universal banks. With the dwindling of DFIs, the burden of financing private investment in areas like infra has fallen on the commercial banks, especially PSU banks, leading to stressed assets. Government-owned IIFCL remains one of the few DFIs in this space, which has been providing long term infrastructure funding, and receives support from both the government and the likes of ADB. But given the requirement, its contribution is minuscule.
Re-emphasising on development banking would be the best way forward. China, South Korea and Malaysia still follow this model. Development banking requires fiscal support and regulatory forbearance.
The writers are Chief General Manager and Economist, respectively, with Exim Bank of India.