"Indiscriminate lending by commercial banks has led to gold plating of infra projects that may either raise consumer tariffs or cause defaults in debt service," said Haldea in strongly worded discussion paper dated June 12.
The paper was sent to the Ministry of Finance, which, then, forwarded it to the IBA.
"This sub-prime lending, predominantly by public sector banks, reflects inadequate due diligence and malfeasance as does the persistence of policy logjams which impede project implementation," added Haldea.
The annual growth rate of credit to the infra sector was 42% between 2001-02 and 2010-11, when it stood at R1,46,700 crore. However, between 2011-12 and 2012-13, growth slowed significantly. As on March 31, the exposure of the banking system to the infrastructure sector (excluding power) stood at R1,10,614 crore, according to Haldea's estimates.
Total exposure of banks to the power sector alone exceeds Rs 3 lakh crore, the bulk of which relates to generation projects, the paper notes.
"The banks evidently lent enormous sums of money to power producers who were encumbered by the fuel price risk as well as the fuel availability risk. This could well be described as 'banana banking'," said Haldea.
In a number of road projects, Haldea points out, the consultants hired by the lenders, had virtually doubled the estimated project costs and also projected a higher level of traffic to sustain the higher costs. However, in a case where a concession agreement is terminated and the NHAI takes over the project, only 90% of the outstanding debt raised for meeting capital costs as specified in the bidding document are considered as "secured loans".
"The more serious implication of this practice is the large uncovered exposure of banks," notes Haldea.
In case of one particular highway project, the banks lent an additional R500 crore several years after its construction was completed. The loans, thus, disbursed were siphoned out by the concessionaire and used elsewhere.
Senior banking officials either refused comment or were not available.
"Over 2009-2011, these sectors saw loan growth in double digits. Obviously, if anything grows this fast and this big, it exposes the banks to risks. But mid-size government banks are more vulnerable than the larger banks," said Saswata Guha, director for financial institutions, Fitch Ratings.