Industries must look beyond banks to fund infrastructure projects as the bad debt overhang has made them risk averse and quite limited in the kind of exposure they would want to take on their books, Reserve Bank of India (RBI) governor Shaktikanta Das said on Monday.
Das was interacting with industry captains at a meeting of the Confederation of Indian Industry (CII) governing council. Listing out the progress achieved in the infrastructure space in the past five years, the RBI governor stressed that gaps remained in the space and the funding of $4.5 trillion by 2030, as estimated by NITI Aayog, cannot be done by banks alone.
“On financing options for infrastructure, we are just recovering from the consequences of excessive exposure of banks to infrastructure projects. Non-performing assets (NPAs) relating to infrastructure lending by banks has remained at elevated levels. There is clearly a need for diversifying financing options,” Das said in his address.
The setting up of the National Investment and Infrastructure Fund (NIIF) in 2015 is a major strategic policy response in this direction, the governor said. However, promotion of the corporate bond market, securitisation to address stressed assets problem, and appropriate pricing and collection of user charges should continue to receive priority in policy attention, the governor said.
While the corporate bond market is dominated by AAA-rated firms, the liquidity measures offered by the RBI have ensured that the issuances in the first quarter have touched nearly Rs 1 trillion, which is a record. “There were apprehensions of the corporate bond market freezing up, but it is as if it has received a new (lease of) life,” the governor said, while admitting that most of the issuances are from the AAA segment. However, consulting with the RBI, the government announced a series of measures, such as the first loss guarantee of up to 20 per cent of the bonds that have helped the lower rated borrowers as well, the governor said.
“I do see renewed activities even below the AAA rated bonds,” Das said, adding the RBI remains “extremely vigilant” on the liquidity needs of the private sector and as and when needed, it will take measures to ease the conditions.
Nevertheless, targeted mega projects, such as the golden quadrilateral, can “reignite the economy.”
“This could begin in the form of a north-south and east-west expressway together with high speed rail corridors, both of which would generate large forward and backward linkages for several other sectors of the economy and regions around the rail/road networks,” the RBI governor said, adding, both public and private investment would be key to financing the infrastructure investments.
The RBI governor asked the industry captains to take it up as a challenge. The RBI governor did not commit on queries or suggestions on one-time settlement, creating a sovereign wealth fund, or a national renewable fund of trillions for long gestation projects. There was also a suggestion of increasing the external commercial borrowing (ECB) limit beyond $750 million, so that industries can take advantage of low interest rate abroad.
“Such ideas do get internally discussed at the RBI. And we are also engaged with the government in discussing these issues,” the RBI governor said. On a query on rupee’s fair value, the RBI governor said RBI’s stance is to check undue volatility and not to defend any level.
The governor also tried to defend banks for reneging on their funding promises to industries, which may cause bad debts later on, and said any funding decision should ultimately be left to the banks.
“There’s an extent to which credit risk can be assumed. End of the day banks are driven by their commercial decision, but as I have written in my foreword to the Financial Stability Report, extreme risk aversion can also create problem for all,” Das said.
There were opposing view on moratorium, while mortgage lender HDFC’s chairman Deepak Parekh asked the RBI governor not to extend the moratorium as entities that can pay are not paying up and that is creating problem for the mortgage lender and small non-bank financial companies. At the same time, Co-Vice Chairman of Bharti Enterprises Rakesh Bharti Mittal advocated moratorium as otherwise lots of businesses will turn up as NPA.
The RBI governor did not give his opinion on moratorium matters.
In his speech, apart from infrastructure, the RBI governor also said there are four other areas where there is a dynamic shift visible and the industries must capitalize on them.
“Indian agriculture has witnessed a distinct transformation,” the governor said, as total production of food grains has reached a record 296 million tonnes in 2019-20, registering an annual average growth of 3.6 per cent over the last decade. The success in agriculture is so much that managing the surplus has become a “major challenge.”
The RBI governor said there should be domestic free trade in agriculture, and policies undertaken by the government should be able to encourage private investment in supply chain infrastructure, including warehouses, cold storages and marketplaces. The opportunity for businesses and industries around agriculture is huge and job creation and farmers’ income augmentation could be enormous, he said.
Renewable energy is also an area that the industries should focus on. With cost for producing renewable energies falling rapidly, industries must look at making solar panels in India.
The RBI governor, in particular, told Indian industries to get into the global supply and value chain, as even 1 per cent increase in participation in the value chain increases per capita income by more than 1 per cent.
“Global shifts in GVCs in response to Covid-19 and other developments will create opportunities for India. Besides focusing on diversifying sources of imports, it may also be necessary to focus on greater strategic trade integration, including in the form of early completion of bilateral free trade agreements with the US, EU and UK,” the RBI governor said.