is self-brewed poison in home backyard. First, the policy-related issues—be these fuel linkages, land acquisition, environmental and forest permits—have thrown this sector into a negative spiral. Second, these assets were financed for average debt maturity of 9 years against the asset life of 15-30 years. They had to come up for refinancing or restructuring and they indeed have. So why are we surprised? For the sake of records, infrastructure lending started big time in 2004-05. Third, the greed of promoters has also not helped the cause. There is borrowing in holding company through loan against shares transaction. This is reflected as equity in project SPVs. Banks lend against this so-called ‘equity’. So, on a consolidated basis, it is all debt with little equity. Fourth, overoptimistic demand projections, especially traffic growth forecasts in the road sector.
These four culprits have brought the sector to its present plight.
But the million-dollar question is, what is the loss given default (LGD)?
If the asset physically does exist and if we are convinced that India is an infra-deficit country and, therefore, long-term demand is intact, then the LGD is expected to be minimal. One must remember that unlike normal bank loan documents, the financing agreements for infrastructure projects are very creditor-friendly giving several options to lenders/creditors for resolution.
Do we expect infra loan restructuring to stop? Probably not. Given that there is a policy angle which needs resolution too, the restructuring may continue well into the next 6-8 quarters. But to re-emphasise, the ultimate LGD could be negligible if timely and smart financial engineering coupled with regulatory support is deployed.
Single name exposures (high risk, most worrisome): India Ratings was the first to highlight this risk back in August 2011 in its report titled “Greater Resilience Post-2008, but Mounting Concentration Risk”.
Concentration risk is defined as the exposure of top 20 entities (and not groups) as a percentage of equity. If it exceeds 200%, it is a red flag. This report was almost prophetic. Come March 2012, some of the large borrowers with hefty debt from banks turned NPLs. This has dealt a blow to the capital adequacy ratios of some banks. The potential risk from this situation could be quite worrisome and bank managements really need to work on methods to alleviate this risk given its lethal power to sink the banks.
Given India’s imperfect regulatory regime, ascertaining LGD or the time to recovery is next to impossible. India ranks