With the rising risk of bad loans, the country’s largest lender State Bank of India (SBI) has decided not to fund interest payments in the infrastructure sector. This move could affect the companies working in the infrastructure segment as they cannot wait until the completion of a project to make interest payments. According to SBI’s chairman Rajnish Kumar, this decision will de-risk the bank’s loan book.
Funding for the infrastructure sector has been a risky move for public sector banks in the country. Moreover, infrastructure projects also have the risk of getting stuck in the middle due to cost overruns. This has made many banks to refrain from funding infrastructure projects in the country.
Infrastructure is one of the key sectors in the country and plays a major role in the nation’s economic growth. This move by public sector banks may prevent growth in this sector and result in a slowdown. However, it must be noted that a large portion of the country’s non-performing assets lies in the infrastructure sector.
Rajnish Kumar stated that SBI will not fund the interest during construction in the future. He said that this move would de-risk the bank in case of a default.
In 2014, the Reserve Bank originally allowed banks to fund cost overruns that are caused by delay in the start of commercial operations. This decision was made to help infrastructure promoters who were struggling at the last stage of project completion due to cost overruns. Under this plan, funding was provided to promoters without treating the loan as a ‘restructured asset’.
Since the introduction of this change, bad loans have increased in various public sector banks in the country. Gross non-performing assets (NPAs) are currently estimated to be 10.2% in September 2017. NPAs are expected to touch 10.8% in March 2018 and 11.1% in September 2018. With the rising risk of NPAs, SBI has decided to minimize its risk in infrastructure lending.
Despite this decision to tighten infrastructure lending, SBI stated that it is still open to fund major corporates that are looking forward to expand.