Choking the banks

The banking sector is going through stressful times the total gross non-performing assets of all banks are estimated to touch Rs 1,50,000 crore by end-March 2012. This is nearly three times more than Rs 56,000 crore in 2008,when the collapse of Lehman Brothers triggered a financial crisis that India managed to weather without much damage. The RBI has also warned that much of the stressed assets are on account of lending to the infrastructure and priority sectors. Ironic it may seem,but these are the very sectors that will continue to require huge funds in the coming years. The government itself has said that the infrastructure sector will need 1 trillion over the next five years.

Within infrastructure,it is the sheer heft of the power sector that has contributed in good measure to the stress. As on September 2011,banks total exposure to the power sector is Rs 3,00,752 crore. The problem is not so acute in roads,or even in commercial real estate,where bank lending is about a third in magnitude. It wont be wrong to say that post-2008,it is power sector lending that has spurred double-digit credit growth. But,unfortunately,this sector is riddled with problems. For instance,states are unwilling to revise power purchase agreements for large projects that depended on import of coal,prices of which have jumped significantly since these projects achieved financial closure in the second half of 2008. Secondly,state electricity boards have been unable to hike tariff commensurate with the rise in input costs. In fact,they have already started defaulting on payments,and triggered a mini crisis. Clearly,it is time to depoliticise the sector and effect a complete overhaul of the regulatory mechanism. State governments have to understand that non-revision of power tariff and non-billing of all users not only wreck the banking sector but their own credibility as well. If not,by March 2012,the power sector will account for Rs 56,000 crore in bad assets.

Last,but not least,policy-makers must realise that infrastructure story cannot ride on banks alone,as is the case today. Bank deposits have an average maturity of 18-24 months,whereas lending to infrastructure projects has to be long term,say 15-20 years. Banks can at best provide working capital finance. The need for developing a corporate bond market is more critical than ever,especially since power,telecom and roads will continue to demand huge funds.