Amidst growing concern of lenders' asset liability mismatch, an HDFC Bank report says the share of bank funding to the infrastructure sector soared to 13.4% in FY'13 from a meagre 1.6% of the total credit thirteen years ago.
"The share of bank finance to the infra sector, within the overall bank funding, has increased from 1.6% in FY'01 to 13.4% in FY'13. Outstanding bank credit to the infra sector has seen a CAGR of 43.4% over the last 13 years against an overall CAGR of bank finance to all industries at 20.4% during the same period," HDFC Bank Chief Economist Abheek Barua said in the report.
More recently, between March 2008 and March 2013 alone, banks' exposure to infrastructure has grown by more than three times, he said. This clearly suggests that banks have been financing infrastructure projects despite the fact that NPAs and restructured assets in this space have increased quite substantially lately, Barua added.
Many rating agencies like Crisil, S&P and Fitch have pegged the recast loans of the banking system will touch 4.4% of the total loan book March 2015. The gross NPAs (Net Performing Assets) and restructured standard advances for the infra sector, together as a percentage of total advances to the sector, has increased considerably from 4.7% at end March 2009 to 17.4% at end March 2013.
Out of this, the power sector had the highest at 19.40% in FY'13 up from 4.54% in FY'09, while for the telecom sector this rose from 1.76% in FY'09 to 15.64% in FY'13, the HDFC Bank report said.
According to the project monitoring group under the PMO, between June and October 9 this year, as many as 328 projects involving an investment of Rs 15.6 trillion were cleared, an increase from 122 worth Rs 5-7 trillion.
Of these projects, the power sector (44%) accounts for the largest chunk of stalled projects, followed by petroleum and natural gas at 11% and road, transportation and highways at 10%. Out of the 328 projects, 94 have been cleared completely worth Rs 3.5 trillion.
According to the World Bank's ease of doing business report, India ranked a low 132 out of 185 economies in 2013, which is clear from the fact that around Rs 20 trillion worth of projects are stuck for want of clearances.
At present, over 50% of Central sector projects are stuck at various stages of implementation, due to variety of regulatory hurdles and sector-specific bottlenecks, the report said. The "more disturbing fact" is that the percentage of delayed projects, which fell to 26 in 2002, has reached a whopping 51 in 2013, it added. This has led to an overrun in costs amounting to a staggering Rs 94,800 crore.
Accordingly, Barua has called for urgent steps to revive infrastructure investment, saying only this can help the economy realise its long-term growth potential and flagged concerns about the fast deteriorating productivity as measured by the incremental capital output ratio.
According to the report, drought in investments still remains the key constraint for an economic revival."The ICOR (Incremental Capital Output Ratio) has been steadily rising over the years, indicating a decline in productivity, which in FY'03 was 3%, and steadily rose to 6% in FY'12 and 6.5% in FY'13," he said. "There is a complete consensus that the only way to reverse the cyclical downturn in the economy is to step up investment spending. With most of the industrial sector operating way below optimal capacity, the infra sector that is associated with chronic under-capacity-has to lead the way," Barua said.
The rise in ICOR over the past few years points to a decline in productivity, caused by the litany of bottlenecks in project execution particularly in the infra space, said the report, adding that "this again underscores the need sto get the infrastructure investment sluice running again." The government has committed massive investment in the five-year plans. Investment as a percentage of GDP rose from 5 in the 10th Plan to 7.2% in the 11th Plan and to a higher 9.1% for the current 12th Plan. This would see the government targeting a whopping USD 1 trillion investments into the infra space, and 37% of this is to come from the private sector.
However, the problem is that the widely used gauge for investment, gross fixed capital formation shows that the strong investment cycle that the economy has been witnessing over last few years, seems to have reversed in FY'12 and has further weakened in FY'13.
The decline has been fast too, thanks to the till recently prevailing vicious investment climate, which has seen the year-on-year growth of gross fixed capital formation sharply falling from double-digits a couple of years ago to as low as 1.7%.