India mulls setting up large infrastructure banks to bridge $1.5t gap

Traffic passes a construction site for the Lucknow Metro developed by Lucknow Metro Rail Corp. and operated by Larsen & Toubro Ltd. in the Hazratganj area of Lucknow, Uttar Pradesh, India, on Tuesday, February 14, 2017. Photographer: Prashanth Vishwanathan/Bloomberg

India is considering turning to the private sector to help plug a chronic shortage of capital for infrastructure projects.

The Reserve Bank of India is proposing Asia’s third-largest economy offer licenses to private companies to set up infrastructure banks. That could help finance $1.5 trillion in roads, ports, power and other projects over the next 10 years and bridge a gap that ratings agency Standard & Poor’s says is shaving off almost 5 percent of the country’s gross domestic product.

“Specialized banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing,” the RBI said in a discussion paper released from Mumbai on April 7.

With commercial banks saddled with huge nonperforming loans and credit growth languishing at decade lows, lenders have been reticent to invest in projects that involve a long waiting period before returns kick in. That bodes ill for Prime Minister Narendra Modi’s government which is trying to spark investment, including clearing a backlog of billions of dollars of stalled projects.

Governments around the world are searching for ways to finance public projects. State-backed lending, led by the China Development Bank, drove infrastructure construction in China last year along with funds raised by local governments through bond sales. Canada is hoping to attract pension funds and global money managers to a new infrastructure bank it plans to set up this year with C$35 billion ($26 billion) in funding, and U.S. President Donald Trump has promised $1 trillion in spending.

India appears to be considering a different approach. According to the RBI’s paper, the banks would source their funds from wholesale and long-term deposits, bond issuance, borrowing and asset securitization, rather than retail deposits. The paper doesn’t mention whether the central bank or government would back the new banks.

India has used government-owned financial institutions to fund long-term projects in the past. The Industrial Finance Corp. of India was set up in 1948, a year after the country won independence from the British, while the Industrial Credit and Investment Corporation of India — parent company of ICICI Bank Ltd., and Industrial Development Bank of India — parent of IDBI Bank Ltd. — were set up in 1955 and 1964 respectively. Over a period of time, they transformed themselves into banks, often leaving a void for infrastructure financing.

‘Vertical Depth’

In recent years, the RBI has been letting businesses enter niche banking areas, with companies like Bharti Airtel Ltd. allowed to set up electronic payment banks and others let into micro financing.

Credit Suisse Group AG analysts expect companies like SREI Infrastructure Finance Ltd., Power Finance Corp., Rural Electrification Corp., to apply for infrastructure-bank licenses. “In the near term, this may be a drag for new banks, but they should benefit in the medium term as they scale-up current deposits and fee streams,” Credit Suisse said in a note.

While large industrial houses wouldn’t be allowed to take more than a 10 percent stake in these banks, individuals with a decade of experience in banking and finance can tie up with business groups to apply for a license. The infrastructure banks would be exempted from opening branches in rural and semi-urban areas and wouldn’t be forced to lend to the agriculture sector.

“The idea is to increase vertical depth and specialized institutional capabilities to take informed decisions as and when a particular sector is getting technically complex,” New Delhi-based Vinayak Chatterjee, chairman and co-founder of infrastructure advisory firm Feedback Infrastructure Services Pvt., said.

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