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Before 2013, if one had to travel from the plush localities of South Mumbai to Navi Mumbai, it would roughly take 90 to 120 minutes on the Eastern Express Highway, along with heavy congestion. However, with the launch of a 16.8km elevated road- the Eastern Freeway, travel time has come down to just 30 minutes. Additionally, several other projects have been underway, such as the 21-kilometre-long Trans-Harbour Link connecting Sewri in South Mumbai and Uran in Navi Mumbai within 30 minutes.
This transformation is not just confined to Mumbai but even the remotest corners of the country such as Ladakh, Arunachal Pradesh, and Kargil where the Border Road Organisation(BRO) has been heavily involved in the construction of roads and highways. These examples are a clear testimony to the fact that India’s road infrastructure is changing with the active participation of the Ministry of Road Transport and Highways and there has been one industry which is clearly capitalizing on this opportunity- the public sector banks.
Data suggests that the budget for 2023 increased the allocation for the National Highways Authority of India(NHAI) by 25% to Rs.1,62,207 crores as compared to Rs.1,34,015 crores. In fact, 60% of the expenditure has been allocated to NHAI.
Banks- the biggest beneficiary of Infrastructure spending
There has been an evident uptick in the loans disbursed by the top four public sector banks such as the State Bank of India, Bank of Baroda, Canara Bank and Bank of India in the infrastructure segment as seen below.
Source: Analyst presentation of FY22 and FY23
Infrastructure lending has seen increased interest from public sector banks. To put some numbers into perspective, the Bank of Baroda has increased its portfolio in lending by nearly 48% in the last seven quarters. Similarly, Canara Bank has seen a 29.75% rise and Bank of India a 12%. The largest public sector lender saw a spike of a meagre 6%.
Interestingly, the share of the ‘roads and ports’ segment has been swelling in the infrastructure lending space as displayed in the graph given below.
Source: Analyst presentation of FY22 and FY23
It is interesting to notice that the loan disbursals of Bank of Baroda under the road and port segment have more than doubled from 15,502 crore rupees in June 2021 to 34,505 crore rupees in December 2022. Similarly, their share of this segment has doubled from 2% to 4.5% of the total domestic advances loan book in the same period. However, the share of SBI has remained flat hovering between 2.5% to 3.8% in each quarter.
Why has there been a huge surge in this segment?
Speaking exclusively to ETBFSI, Bank of Baroda’s MD and CEO Mr Sanjiv Chadha says, “there has been a strong link between the capital expenditure of the government and the sectors which have seen growth. This intervention has been worked by the way of money that has been spent but also in terms of how the operating environment has been altered to make the risks again less. The road sector is an obvious case in point where because of the hybrid annuity model, you have a fund flowing from the government to the NHAI regarding viability gap funding. Secondly, the regime requires that one should have actually acquired 90% of the land before one starts a project. It also means that once the project is complete, the market risk does not impact banks, because there is an annuity which is in place. So I think, the intervention of the government selectively in the sectors that really matter is something which has had a very big impact and now with the 33% growth in capex, the scope of the salutary impact is much more.”
Under the Hybrid Annuity Model, the National Highways Authority of India(NHAI) pays 40% of the total project expenditure. This payment is released in ten equal instalments based on the completion of targeted project milestones and the remaining 60% amount has to be arranged by the road developer. The developer finances around 20 to 25% of the total project cost. The remaining amount of money is raised as debt. Hence, this has mitigated the risks, which earlier banks would have had to take.
Not only this, but he also adds how an increase in the expenditure spent on capex would also have a second-order effect on core industries like cement and steel. Additionally, due to this, even private-sector investments have been picking up, which will eventually improve the prospects of the economy.
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