Respite for lenders as states vie for investments

1 min read . Updated: 11 Dec 2022, 09:36 PM IST Shayan Ghosh

Bankers said states are offering subsidies, favourable land deals and other incentives to encourage investments and job creation

Few large capex private projects and competition between states to secure them are benefiting lenders, who can now be more confident that companies will be able to complete the projects on time.

Bankers said states are offering subsidies, favourable land deals and other incentives to encourage investments and job creation. This, they said, is benefiting banks financing the projects because it offers them some assurance that the projects will not be stalled unless there are major policy changes. Infrastructure projects have often been delayed due to challenges with land acquisition and other issues.

Of 1,566 infrastructure projects worth ₹150 crore or more each, eight were ahead of schedule, 260 projects were on time, and 697 projects were delayed as of 30 September, according to the infrastructure and project monitoring division of the ministry of statistics and programme implementation. Further, for 601 projects, either original or the anticipated date of completion was not reported.

“Delay in land acquisition and forest clearance has been one of the reasons for time overrun leading to cost overrun as reported by implementing agencies," minister of state (independent charge) of the ministry of statistics and programme implementation Rao Inderjit Singh said in response to a question in the Lok Sabha on 3 August.

According to a senior banker, when states compete for projects, delays are likely to be minimal, which benefits banks that provide partial funding. Once the project is completed, companies can generate cash flows to repay loans. As of 31 March, corporate loans accounted for 44% of the total banking sector non-performing loans, followed by the services sector at 27% and agriculture at 21%, showed data from the Reserve Bank of India (RBI).

“Delays lead to increase in project costs, which often lead to difficulties in repayment of large loans. It is a relief that states are providing offers on land, one of the primary reasons for project delays," the private sector banker said.

The banker cited the example of Kerala-based Kitex Garments Ltd, whose chairman Sabu M. Jacob, had, according to news reports, alleged harassment by the Kerala government before being wooed by the Telangana government to invest in the state. In September last year, the company told stock exchanges that it signed an agreement with Telangana to invest ₹2,406 crore.

“It is getting easier for promoters and corporates to get land and get a new project up and running. All the approvals are in place even before you know. Not only are state governments doing all this, they are also providing subsidies," said Rajiv Anand, deputy managing director of Axis Bank.

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Anand said that while the bank may not necessarily take the subsidies into account for assessing the viability of a project, the fact that the states are offering them is mitigating execution risk.

There is also the case of Vedanta-Foxconn’s semiconductor plant planned in Gujarat. On 13 September, Vedanta announced plans to build a semiconductor fabrication unit, a display fabrication unit, and a semiconductor assembling and testing unit in Gujarat. Vedanta will hold 60% of the equity in the business venture, with Taiwanese electronics manufacturer Foxconn holding the rest.

While the Maharashtra government offered a capital subsidy of up to 30%, among other benefits, for setting up the plant in the state, The Indian Express reported that Gujarat upped the ante with a better offer. Tamil Nadu, Telangana and Karnataka were also looking to land the project.

While bankers reported some improvement in capex demand, private investment has yet to gain significant momentum. During FY22, 28 banks and financial institutions actively involved in project finance reported 403 projects, compared to 220 projects reported during FY21, and 320 projects in FY20, mainly due to an increase in small-ticket projects, RBI said in its August bulletin. Though the envisaged total project cost of ₹1.43 trillion in FY22 is almost double the ₹75,558 crore in the previous fiscal, it is still lower than pre-covid levels.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.