Indian infrastructure initiative has weak links: Fitch
19 Jan 2012
An Indian government initiative to use state-owned corporates' cash reserves to boost infrastructure spending has to overcome several hurdles before it will benefit the corporate and banking sectors. saysd a new report by ratings agency Fitch Ratings.
It highlights that key reforms are needed before corporates' capital expenditure on viable projects can increase significantly. Many companies have lower capital expenditure than they would like as projects have been delayed because they have not been able to acquire land in time. Although the government has proposed reform of land acquisition rules it is likely to be some time before that is passed, in light of the current political deadlock.
The poor health of the state electricity boards also raises doubts about the long-term viability of power projects in India. This will only be rectified through policy reform. As these boards are unlisted and primarily funded by government banks, it is sometimes easier for governments to postpone the hard decisions that reforms may require (eg, rationalisation of power tariffs, or reduction of distribution losses).
Even if equity for the infrastructure projects is forthcoming, sourcing debt will be a challenge. The sponsors would be likely to look to government banks to commit long-term loans - a role that these banks have played aggressively since 2008. However, banks have now turned cautious as their existing infrastructure loan portfolios face delays and cost overruns.
We are concerned about government banks' growing concentration risk resulting from their past focus on project lending, together with the emerging funding pressures of such long-term lending.
Any significant increase in the proportion of infrastructure loans leading to further weaknesses in asset quality and funding could affect the standalone credit profile of government banks in India and lead to downward pressure on their Viability Ratings.
If the scheme does take off it could be positive for the banking and corporate sectors as well as the broader economic recovery - although the benefits may not start materialise until 2013 due to the implementation challenges.
The new investments may boost core sectors such as steel, cement, construction equipment and commercial vehicles, and the credit cycle and asset quality outlook of Indian banks could improve.
