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India requires an investment of almost INR 65,000 billion (USD 1 trillion), at current prices, in the infrastructure sector in the period from 2012 to 2017. However, total funds available are expected to be approximately 31% short of the targets set for infrastructure financing, translating into a debt funding gap of almost INR 19,000 billion (USD 320 billion) for the plan period, and there are constraints in filling this huge funding gap (Planning Commission, Government of India [2011]).
In light of the lack of other long-term funding alternatives, notably corporate bonds and pension and insurance funds, bank credit has been playing a critical role in infrastructure financing. Apart from budgetary support that accounts for about 45% of the total infrastructure spending, commercial banks are the second largest source of finance for infrastructure-about 24%. Outstanding bank credit to the infrastructure sector, which stood at INR 72.43 billion (USD 1.22 billion) in 1999-2000, has increased steadily to INR 7860.45 billion (USD 132.82 billion) in 2012-2013, a compounded annual growth rate (CAGR) of 43.41% over the last 13 years (Reserve Bank of India [2013]).
Most of these loans are to newly formed special purpose vehicles (SPV) or project companies that are sponsored by a corporation or two or more sponsors joining together. The newly formed project vehicles, or SPVs, are mostly rated BBB or below, and the spreads on the syndicated loans to them are sometimes lower than spreads available in the bond market for such low-rated SPVs. Thus, many infrastructure companies that are rated in the sub-investment grade find syndicated loans, arranged by banks, attractive in terms of pricing. Also, a bank loan as senior debt has an advantage, as the appraisal revalidates the project and the covenants often act as a tripwire for other debt providers if the asset quality deteriorates.
The asset quality of infrastructure loans has started to deteriorate rapidly in India. Based on the data available from the Reserve Bank of India (RBI), it is observed that between March 2009 and March 2012, while total gross advances of the banking system grew at a CAGR of less than 20%, restructured standard advances grew at a CAGR of more than 40%, while the growth rate of restructured advances for the infrastructure portfolio grew...