India's ambitious infrastructure development plans are facing a significant challenge, with nearly 40% of projects running behind schedule, leading to cost overruns. A government report reveals that out of 1,873 projects, 779 are delayed, causing a cost overrun of INR 5 trillion, increasing total project costs from INR 26.9 trillion to INR 31.9 trillion. This situation raises concerns for banks and NBFCs, which have loaned INR 26.9 trillion for these projects. The delays disrupt the repayment cycle, prompting the RBI to propose stricter guidelines for project loans. Despite these issues, infrastructure loans have grown by 30% over the past five years.
India's ambitious infrastructure development plans are facing a hurdle - delays in project completion. A recent report by the government reveals that nearly 40% of infrastructure projects are behind schedule, leading to a significant rise in costs. This situation is raising concerns for banks and non-banking financial companies (NBFCs) that have loaned a total of INR 26.9 trillion for these projects. Out of 1,873 projects, 779 are delayed, resulting in a cost overrun of INR 5 trillion, representing a 19% increase in total project costs (from INR 26.9 trillion to INR 31.9 trillion).
Banks and NBFCs that financed these projects face challenges due to the delays. Large infrastructure projects typically generate income upon completion, which allows borrowing companies to repay their loans. However, delays disrupt this repayment cycle, putting a strain on lenders. Experts believe this situation may have prompted the Reserve Bank of India (RBI) to propose stricter guidelines for project loans, requiring banks to set aside up to 5% of the exposure during the construction phase as a buffer against potential defaults. This provisioning can be reduced as the project becomes operational (2.5% of funded outstanding) and further down to 1% if certain conditions are met.
Despite the challenges, loans provided by banks to the infrastructure and construction sectors have grown by 30% in the past five years. In March 2024, total construction and infrastructure loans reached INR 14.6 trillion, a significant increase from INR 10.8 trillion in January 2019. Bank loans to the construction sector alone have risen nearly 26% in the same period, from INR 1.08 trillion to INR 1.4 trillion. Loans to the infrastructure sector have grown even faster at nearly 31%, rising from INR 9.8 trillion to INR 12.8 trillion.
Industry experts point to delays in obtaining government approvals as a major reason for project setbacks. Implementing an effective policy framework to expedite approvals could significantly improve project completion timelines. This would benefit both lenders and borrowers by ensuring timely loan repayments.
The government report identifies 51 critical projects with substantial delays and cost overruns, contributing nearly 37.35% of the total cost overrun and 19.92% of total time overrun. These projects require special monitoring by relevant ministries to address bottlenecks and ensure progress. By focusing on these high-risk projects and streamlining approvals, India can get its crucial infrastructure projects back on track and mitigate the financial risks faced by lenders of over INR 26.9 trillion.
Advertisement
Facebook
Whatsapp
