Construction of highways and power plants hit; banking sector to be affected as loan defaults set to rise

The paralysis in the government has hit the implementation of infrastructure projects, such as the construction of highways and power plants, which are required to boost the country's economic growth rate. The holding up of these projects has serious financial implications for the country's banking sector as well since it could lead to more defaults in loan repayments.

"Delays in the implementation of infrastructure projects, increased cost of raw material linkages, such as coal and growing exposure to state electricity utilities with weak credit profile are expected to lead to an increase in the non-performing assets (NPAs) of Indian banks," said the latest report by Fitch Rating. Fitch Ratings says that the growing concentration risk of Indian banks could result in more volatile non-performing loan (NPL) ratios than those seen during the last 10 years.

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Most of the growth in such bank loans since 2008 is attributed to infrastructure loans that should likely continue till 2012-13 before hitting a sectoral cap, the report adds. The 20 biggest loans of most banks are to highly-rated domestic corporates and to the infrastructure sector, where credit risk is historically low.

"However, with projects especially in the highways and power sector getting delayed the risk of NPL spikes could be high for some banks as investments in these sectors are very lumpy," said Ananda Bhoumik, senior director Fitch Rating.

The figures have been compiled till end-March 2011 for 24 top government and private banks rated by Fitch in India. The Fitch Rating report says that the credit losses for banks from any NPL spike could be manageable, given the critical need for infrastructure in the country and expectations of government policy support to avoid a crisis in the sector.

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However, industry sources say the problem is that the Centre is just not acting fast enough. The government had approved a number of infrastructure projects in 2008-09 to rev up the economy and minimise the impact of the global economic meltdown. The finance ministry had also asked banks to provide loans to give a fillip to the economy.

However, with the government caught in a spate of corruption scams, the decision making process has virtually ground to a halt leading to a delay in the follow-up action on these projects. "While finance minister Pranab Mukherjee has expressed concern over the growing NPAs of public sector banks, the government is trapped in an inertia and is not being able to push decisions to create a conducive environment for the infrastructure projects to take off," a senior banker told Mail Today.

Environmental issues had held up the approval of power projects as most of the coal mining areas had been declared as 'no go' areas. Now with the change in guard at the ministry of environment and forests when things were expected to get moving once again the government has landed in fresh trouble.

The manner in which it has handled the protests of civil society activists has only added to the economic uncertainty.

Courtesy: Mail Today