A distressed asset crisis in India’s infrastructure sector is slicing a full percentage point from national growth, according to the head of the country’s biggest engineering and construction group, who wants banks to swallow losses in order to get stalled projects moving again.
AM Naik, executive chairman of Larsen & Toubro, criticised Indian banks for indulging in “a hugely liberal giveaway” of loans to infrastructure and power developers over much of the past decade, resulting in a ballooning pile of distressed assets as many of his peers have struggled to service their debt.
Large capital projects worth Rs11.2tn ($168bn) were on hold as of the end of June, according to the Centre for Monitoring Indian Economy think-tank, largely because their developers lack the financial strength to pursue them.
A growing number of Indian and foreign institutions have spotted an opportunity to invest in viable projects at a discount, through buying the distressed loans and extending further support to the borrowers.
Troubled Indian oil group Essar on Saturday sealed a deal to sell oil and port assets worth $13bn to investors led by Russia’s Rosneft, in order to pay down debt.
But some distressed debt investors have complained that India’s banks are not willing to accept a fair price for the distressed loans, for fear of the resultant hit to their balance sheets.
Mr Naik — whose group generated revenue of Rs1.04tn in the last financial year in areas ranging from road construction to power plant development — told the Financial Times that the country’s banks needed to be “more pragmatic” in disposing of the troubled assets at steep discounts. He also called for controlling shareholders of rival infrastructure companies to cede control of their projects where necessary.
“There are half-completed projects waiting to be finished, distressed projects to be carved out and sold,” Mr Naik said, adding that the developers in question “cannot draw more money because the banks have put the tap off”.
“Had it not been for this situation, the [country’s] growth would not be at 7.5 per cent — it could be at 8.5 per cent,” he said.
India’s economy grew 7.6 per cent in 2015 but the rate slowed to 7.1 per cent in the second quarter of this year, held back largely by weak private sector investment. While the distressed debt problem is seen as having played a role by sapping banks’ ability to lend, economists have warned that even their most favoured borrowers — companies with strong balance sheets — are showing weak appetite for investment.
Mr Naik agreed. He said Larsen & Toubro would have no trouble financing investment: its debt to equity ratio stood at 200 per cent at the end of March, much lower than peers such as GVK Power and Infrastructure, at 883 per cent.
But he added that Larsen & Toubro would hold back on major capital expenditure while it worked to “clean up” problems with projects it had pursued under the government’s public-private partnership scheme — part of India’s plans for $1.5tn of infrastructure investment over the next decade.
“Solid groups no longer have a need for money: at this point in time, each one wants to put its house in order,” he said. “If I want to put up a project tomorrow, 10 banks will come. But I don’t want to.”
