The delay in nearly 40% of infrastructure projects, coupled with escalating costs, could strain banks and non-banking financial companies (NBFCs), increasing the risk of non-performing loans.
According to a recent report by the ministry of statistics and programme implementation, these project delays have resulted in a cost overrun of Rs 5 trillion.
Out of the total of 1,873 infrastructure projects, with an investment of Rs 26.9 trillion, 779 projects are delayed. This delay has increased the total cost of these projects to Rs 31.9 trillion, reflecting a 19% cost overrun.
“Large infra projects financed by banks or NBFCs are expected to generate cash flows upon their completion. These cash flows are crucial for the repayment of loans,” head of wholesale banking of a public sector bank told FE.
“Project delays impact the loan repayment cycle of companies, creating challenges for the lenders,” he added.
Experts say that the delay in completion of infra projects might have prompted the Reserve Bank of India (RBI) to issue draft guidelines for project finance which stipulate up to 5% provisioning for project loans.
Under the proposed norms, a bank has to set aside 5% of the exposure during the construction phase, which goes down as the project becomes operational.
Once the project reaches the ‘Operational phase’, the provisions can be reduced to 2.5% of the funded outstanding and then further down to 1% if certain conditions are met.
These guidelines are applicable to all commercial banks, including small finance banks and NBFCs.
“The delay in completion of projects make lenders averse to finance these large infrastructure projects. Most of these large infrastructure projects are delayed due to delay in getting approval from government departments,” said a senior official of a private sector bank. “There should be an effective policy framework to fast-track approval for large infrastructure projects,” he added.
Despite challenges associated with timely completion of infrastructure projects, loans to the infrastructure and construction sectors given by banks have grown by 30% in the past five years. According to the RBI, the total construction and infrastructure loans of banks increased to `14.6 trillion in March this year from `10.8 trillion in January 2019.
Bank loans to the construction sector have risen by nearly 26% in the past five years. Loans to construction sector have grown from `1.08 trillion in January 2019 to `1.4 trillion as of March this year. Loans to the infrastructure sector have risen nearly 31% in the same period. Loans to infrastructure sector have grown from `9.8 trillion in January 2019 to `12.8 trillion as of March this year.
“Analysis of projects showing substantial time and cost overrun depicts that 51 projects having cost overrun of 50% and more and time overrun of 50 months and more, contribute nearly 37.35% of the total cost overrun and 19.92% of total time overrun,” noted the report of the ministry of statistics and programme implementation.
These projects are required to be taken up for special monitoring by the respective administrative ministries, the report added.