A large pile of debt on the books of India’s big infrastructure companies is complicating Prime Minister Narendra Modi’s plans to boost the country’s economy and improve its woeful roads, electric grids and other public works.
The companies that build big projects owe more than 3 trillion rupees ($48 billion), the result of a failed effort by the previous government to get businesses to help improve India’s infrastructure. The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won’t be repaid, are reluctant to lend to other companies.
Debt levels have risen across Asia in the past five years and are now higher than they were before the Asian financial crisis in 1997. The borrowing has taken different forms in different countries. In China, giant state-owned companies borrowed the most, in Thailand and Malaysia, consumers took on debt, while in Japan, the government boosted its world-leading borrowing.
High debt levels could limit India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak. Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.
In India, overall debt levels are relatively low. But the sector struggling the most with its borrowing is also one that Mr. Modi is counting on to juice the economy and boost the country’s productivity. Instead, the companies are now focused on reducing their debt.
“At this point, we are not able to commit more equity to new projects,” said Ankineedu Maganti, managing director of Soma Enterprise Ltd., a south India-based developer of roads and other infrastructure projects. “We’re still trying to recover from the past.”
Bangalore-based GMR Infrastructure Ltd., which built international airports in Delhi and Hyderabad, had net debt of $6.3 billion at the end of September. Its total debt to equity ratio stood at 3.7 times in September, compared with 1.9 times at the end of 2010, according to data-provider S&P Capital IQ. GMR has said that it won’t take up new highway and energy projects for at least the next 12 months. Jaiprakash Associates Ltd., a north India-based maker of hydropower projects and builder of India’s only formula-one racetrack, has been selling assets to pare debt, which stood at around 700 billion rupees at the end of March 31, 2014.
“The first step is repair rather than build,” said Srikanth Vadlamani, an analyst at Moody’s Investors Service who tracks financial institutions in Asia Pacific region. “Investment pickup has to come from the public spending, if it all,” he said.
All this will test Mr. Modi’s ambitious plans to build thousands of kilometers of new roads, airports and high-speed rail networks.
The government, which barely met its budget deficit target last year, plans to boost spending on infrastructure by 700 billion rupees this year and sell bonds to bolster that amount. “We are looking at bringing in foreign pension funds to pump in finance in India’s infrastructure sector,” Union Road Transport and Highways Minister Nitin Gadkari said at an event in April.
If the government is paying, some infrastructure companies, especially less indebted smaller ones, say they’ll take on projects.
For years, the Indian government was the largest developer of infrastructure in the country. But in 2006, it decided to increasingly involve the private sector via so-called public-private partnerships. As India’s economy grew rapidly–at more than 9% between 2006 and 2008 — and capital was relatively cheap, companies bid aggressively to build roads, airports and ports.
Investments in infrastructure involving private partnerships touched $73 billion in 2010, a nearly tenfold jump from 2005, according to World Bank data. These projects typically involved 20% to 30% equity from the developer, and the rest was borrowed money, often from Indian banks.
The aggressive bids became costly when many projects stalled thanks to corruption scandals and lack of government approvals. Even completed projects such as toll roads aren’t paying off because traffic levels have been 20% to 30% lower than builders’ initial expectations, according to Indian research firm ICRA Ltd.
For Indian builder Soma, delays have been costly. The company just got all of the necessary approvals for several projects that were supposed to have been completed by 2011 and 2012, said Mr. Maganti, the firm’s managing director.
“This delay has had huge cost implications for us,” said Mr. Maganti. He said both interest costs and the cost of raw materials have gone up, adding to the firm’s debt burden.
Soma was helped through the delays by its banks, which restructured some of its debt in 2013, giving it a two-year break from principal and interest payments.
India’s banks have been hit hard by companies like Soma. Bank lending to infrastructure companies rose 36% a year over the past decade, well above overall credit growth of 22%, according to PHD Chamber of Commerce & Industry, a trade association, and Crisil Ltd., a ratings and research agency.
In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks.
The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December. “The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets,” the report said. “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”
Banks have been pushing infrastructure companies to sell assets and pay back debt. But India’s insolvency laws make it unattractive for lenders to push companies into liquidation, so the standoff is likely to continue.
“My personal fear is that these…companies will continue to haunt the balance sheets of Indian banks for the next five to 10 years,” said Deep Mukherjee, senior director at India Ratings & Research, a unit of Fitch Ratings.
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