Well, the days ahead for roads and highways sector will be VERY ROUGH.
The incumbent Indian Government has been on a ride as far as accelerating country’s roads and highways development is the subject matter. No other Government is known to have bid out contracts and projects at the aggressive rate and scale at which this administration has been awarding projects.
It’s definitely unprecedented. But, when so much of projects are being bid out, well, the builders need money to execute and complete the projects. It’s not like just winning the bid would do the job. And, that money doesn’t come out of the builder’s own pockets.
In fact, most of them don’t even have that kind of money. Thus, the money to invest into these projects comes through banks and other financial channels like NBFCs, Pension funds and Insurance biggies which have a ginormous pool of money to invest for long term.
But, mostly, it’s the banks which lend money to the builders who carry out such projects. At least that is the case in India of today. And, this is where the problem is beginning to crop up.
Under the previous administration (UPA-2) most Public-Sector Banks lost their lending moralities and lent out money to cronies and capitalists because of incessant political pressure and meddling. And, when the administration changed in May 2014, the new Government found itself in a deep mess.
Thus, it initiated a crackdown on such banks and their illicit and corrupt history.
Slowly, a huge pile of NPAs begun to spring up as the incumbent Government kept pushing the banks to go through stringer audits and checks. Consequently, it was revealed that our Public-Sector Banks were in a self-deprecating lending cycle which had wrecked them up financially.
Thus, to better the state of banks, Insolvency and Bankruptcy Code was brought to life. A massive recapitalization exercise was initiated as well. And, similarly, stricter provisioning clauses were imposed on the banking institutions to keep them afloat and to recover and to make up whatever losses that they had made in the past.
But, in case of many of the 21 Public Sector Banks, too much of damage had already been done. Thus, a lot more stricter supervision and controls over them was a necessity. A call which could be delayed and deferred no longer. And that is exactly what RBI did when it brought 11 of those most affected banks under the blanket of PCA.
PCA stands for Preventive and Corrective action whereby the bank’s lending capabilities and capacities are curtailed. Also, a lot of other restrictions are placed but the major action is what I just mentioned. The RBI fetters the banks under PCA to lend bigger loans.
The intention is to do all it takes to keep them from going out of business. And, so bad is the scene that it is being speculated that 6 more Public Sector Banks can be brought into PCA anytime now. That would take the toll to 17 out of total 21 Public Sector Banks with supreme lending and administrative restrictions.
Ergo, a huge number of banks would not be able to lend much any longer. And that is a big worrisome affair for infrastructure sector (including roads and power) which usually need big sums of money for execution.
And that is where the dark clouds looming over the fate of road construction sector of India are emanating from.
Because when so many of the prime lenders to such projects will no longer be able to lend money, there will be an utter shortage of capital to fund and execute these road projects in the times to come. And, it’s not just the road projects but also all sorts of large scale infrastructure projects.
And as a result there will be cost escalations, upward revisions, completion delays and a lot other hassles which obviously don not harbinger a smooth track ahead. Bliss!
And, that’s the whole picture. The black and ugly of it. This answer has tried to explain the intertwined but very critical relationship between the state of Public Sector Banks and the fortunes of road construction and other infrastructure-related sectors. Period.
Signing off,