RBI does its job, over to the govt now

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Infrastructure projects have been on a slow track for a variety of reasons and over the last couple of years there has been a sharp decline in institutional funding, led both by a decline in demand and banks unwilling to increase their exposure to the sector. While the overall credit growth dipped to 8.2 per cent in July 2015, the year-on-year monthly credit growth for the infrastructure sector declined to over two-year low of 8.3 per cent in July – down from around 20 per cent in June 2013.

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Experts say that a rise in non-performing assets (NPAs) within the sector, high number of stalled projects and weak financial ability of players led to this decline in loan take-off and thereby a dip in investments.

Even the Reserve Bank of India seems to be eyeing a pick-up in investments when it decided to go ahead with an unexpected rate cut. Stating a reason for the 50 basis point cut, Rajan, in his policy statement, said, “Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow.”

With the State Bank of India announcing a 40 basis point cut in its benchmark lending rate, experts say that this will not only improve the viability of stalled projects, but will also enthuse India Inc to start investing.

Kuljit Singh, partner and industry leader, Infrastructure at Ernst and Young said that a cut in rates will improve the return on equity for companies. “If the debt funding of a project is 70 per cent, then a 25-30 basis point cut would lift the equity return by 0.6-0.7 percentage points, which is a good increase in return,” said Singh.

Infrastructure projects are known to generate return on equity of 15-16 per cent in the long run and while that percentage is low for now, a rise in return will only enthuse India Inc to invest in infrastructure.

Singh added that the announcement also provides a psychological boost and the stalled infrastructure projects that were suffering from high debt and high interest payout will slowly start to become viable.

Manish Agarwal, leader, infrastructure at PricewaterhouseCoopers, too, said that rate cuts would help lift infrastructure activity. “Lower interest rates will significantly help improve financial ability of infrastructure assets,” he said.

While India needs investment amounting to around $1 trillion for building infrastructure over the next few years, declining interest rates will only help the country’s need and desire to build roads, ports, bridges etc, subsequently helping to lift economic activity. Virendra D Mhaiskar, CMD, IRB Infrastructure said that the rate cut was much needed for the road sector and toll operators. “It was severely needed. As a concept, most toll projects have tariff linked to inflation and with inflation going down there has been no tariff revision. So to match that shortfall, the rates were required to go down,” said Mhaiskar.

More steps needed

While all stakeholders agreed that the 50 basis point cut in rates was much required and will improve investment sentiment, they pointed out that in isolation, it may not go too far and the Central and state governments need to work together to lift the sentiments.

Hemant Kanoria, CMD, Srei Infrastructure, said that while the rate cut will bring down the overall cost for infrastructure companies and projects, there is work required on other fronts as well.

“While coal mine auction is through and they have been allocated to power plants, a lot of work is required on the power distribution side. It is a major bottleneck and the state governments will have to do a lot on that front,” said Kanoria.

Mhaiskar, too, said that measures are required from the Central and state governments and they have to work in unison. “In many cases, the Central government wants to go ahead with the public-private partnership (PPP) model, but the state government is not clear. This doesn’t send the right message. Both have to work in uniformity,” said Mhaiskar.

Even a recent RBI article stated that institutional lending to infrastructure projects has hit a decade low. Pointing out the areas that need to be addressed, the article said, “Positive measures for unclogging of stalled projects, addressing the financial stress of certain sectors like power, rising out of under-utilisation of capacities on a priority basis and timely implementation of supportive policies and reforms could pave the way for a momentum in private investment to expect a turnaround of the economy in the coming months.”

A former RBI official, too, said that there is need to revive stalled projects, as they account for almost half of the NPAs in the banking sector.

While many feel that the government would have to kick-off infrastructure investment, and then the private sector can be crowded in, but before that happens, factors like interest rates and other bottlenecks need to be sorted.