Indian infrastructure lending defies credit slump

A strong level of lending to infrastructure projects in India is bucking the trend of a weaker credit climate overall, according to new figures from the Reserve Bank of India.

The latest available data shows Indian banks recording a 44.7 percent year-on-year increase in credit provided to infrastructure projects in the year to August 28 2009, compared with a 36.1 percent increase in the prior year.

Indian infra: lending up
by almost 48%

The figures compare with a slowdown in the growth of credit in the country overall, to 13.3 percent in the year to August 28 2009, from 26.5 percent during the prior year.

With Indian infrastructure project developers showing strong appetite for credit, banks are taking the opportunity to grow their balance sheets in this area.

The encouraging figures come despite the existence of what practitioners see as some fairly tall obstacles to infrastructure lending in India.

For one thing, many banks are overweight in deposits with three-year maturities, whereas infrastructure projects typically require financing for tenures of 15 years or more. For this reason, India is beginning to see the development of ‘take-out’ financing, a mechanism designed to avoid asset-liability maturity mismatches.

Banks are also seeking a more favourable tax environment. Specifically, the finance ministry is being urged by banking representatives to introduce a 100 percent income tax deduction on income earned from infrastructure financing for five consecutive years, with a 50 percent deduction for the subsequent five years. “As our post-tax yield will be higher, we will be in a position to charge project developers lower interest rates,” a public sector bank senior official told the Hindu Business Line.