Infrastructure project financing

According to the quarterly Infrastructure Finance Review (July-September, 2016) released by the State Bank on 6th January, 2017, infrastructure projects in the country witnessed substantial increases in financing from banks and DFIs in the recent period as total amount outstanding against these projects reached Rs 452 billion at the close of September, 2016, recording an increase of 8.3 percent during the quarter. On year to year (YoY) basis, outstanding amount increased by Rs 118 billion or 35 percent while cumulative amount disbursed rose to Rs 570 billion as of September, 2016, showing an increase of 9.8 percent over June, 2016. Total amount sanctioned by banks and DFIs for infrastructure projects also surged to Rs 1.125 trillion in September, 2016, up from Rs 1.024 trillion in June, 2016, showing a growth of 10 percent. About 64 percent of the amount was sanctioned to the power generation, 9 percent to telecom, 8 percent to roads, bridges and flyovers, 5 percent to oil and gas exploration/distribution and 4 percent to water supply projects. On a more positive note, NPLs as a percentage of gross outstanding portfolio also decreased from 3.39 percent to 2.76 percent on a quarterly basis and from 4.75 percent to 2.76 percent on a yearly basis. Overall NPLs declined by 12 percent from Rs 14.16 billion at the end June, 2016 to Rs 12.5 billion by end-September, 2016.

A sharp increase in infrastructure projects' financing is of course a very welcome development for the country, particularly when the overall private sector credit is not rising commensurately. This also shows keenness of the financial institutions to lock their funds in projects having a long gestation period, even at the present depressed rate of interest. Such a trend indicates that the banks and DFIs do not expect a substantial increase in the interest rate structure in the near future and are also prepared to lend on a long-term basis due to improved law and order situation in the country. Another positive feature is that the projects selected for financing are also ideally suited to the development of the country. Most of the amount has been disbursed for power generation and transmission, telecom sector, oil and gas and bridges and roads. All these sectors require large infusion of development funds to accelerate the process of investment and growth. A decline in NPLs cannot be easily explained but would definitely encourage the financial institutions to lend more for infrastructural financing. The fact that such a news has come at the start of China-Pakistan Economic Corridor (CPEC) projects is also a healthy development. However, while welcoming this news, we will urge upon the government to continue financing infrastructure projects through mobilisation of higher fiscal resources and not look towards banking resources for the purpose. Higher borrowings by the government for these projects from banks would squeeze the flow of bank credit to the private sector and undermine near-term growth prospects of economy.