India’s banks will lend. Will tycoons borrow?

Banks’ exposure to industries that used to be some of their biggest borrowers — roads, power, telecommunications, ports, airports, construction, property builders — is down to 11% of their loan book, half what it was a decade ago.

By Andy Mukherjee

There’s plenty of talk about how India’s 600-million-strong workforce gives it a unique edge in the US-China spat over trade and technology. But to be the world’s next factory, the most-populous nation will need a strong domestic investment impulse.

The data don’t show any evidence of that. Nor does the authorities’ response inspire confidence. When it comes to large, long-gestation projects, a handful of tycoons will do the heavy-lifting, and it will take more than cheaper borrowing costs to sway their decisions.

The private sector’s capacity-expansion intentions have fallen to a three-year low. Banks’ exposure to industries that used to be some of their biggest borrowers — roads, power, telecommunications, ports, airports, construction, property builders — is down to 11 per cent of their loan book, half what it was a decade ago.

Sanjay Malhotra, the new Reserve Bank of India governor, has thrown the kitchen sink at what is basically a problem of comatose animal spirits. Within six months of his appointment, he slashed the benchmark interest rate by 1 percentage point to 5.5 per cent and flooded the banking system with liquidity. He also eased financing norms for small individual borrowers that rely on microcredit, or loans against gold jewelry.

All this will have an indirect effect at best. The real-estate industry may gain as lower mortgage costs entice homebuyers. However, a broader investment-led credit cycle continues to elude. Which is why the RBI has now mandated that banks set aside 1 per cent to 1.25 per cent of their loans to unfinished projects to offset any losses. The requirement drops to 0.4 per cent to 1 per cent when assets start generating cash. These norms are more relaxed than last year’s draft guidelines. Those would have raised borrowing costs by asking lenders to make loss provisions of as much 5 per cent.

But how will funds flow into projects that create new assets, when the bottleneck is not in supply of credit but demand? In October, S&P Global Ratings had predicted an $800 billion tsunami of investment by Indian conglomerates over 10 years, about 40 per cent in new areas like green hydrogen, clean energy, aviation, semiconductors, electric vehicles and data centers. Throw in the infrastructure needed to sustain these industries, and it would automatically mean a whole lot of new projects, and demand for bank financing tied to future cash flows.

But for that, the tycoons need to be confident.

Among local billionaires, Gautam Adani may still be on track to binge on capital expenditure, despite a US Justice Department indictment for alleged involvement in a bribe-for-contract plot. His group would invest $15 billion to $20 billion annually over the next five years, he announced at a shareholders’ meeting this week.

Rival conglomerates, however, are distracted. Mukesh Ambani has to steady his empire first — and spin off retail and digital services in public markets to unlock value in Reliance Industries Ltd. The 157-year-old Tata Group has to sort out the mess at Air India, the struggling airline at the center of the country’s worst passenger jet crash in nearly three decades. Billionaire Sajjan Jindal is embroiled in knotty legal proceedings. The Supreme Court in New Delhi has annulled his JSW Steel Ltd.’s purchase of a bankrupt company — four years after he paid creditors $2.7 billion to acquire the unit that’s now 13 per cent of his steel revenue.

So much for the four pillars of the national team. The appetite for credit is subdued even among smaller companies. They are still scarred by the bad-loan crisis that erupted a decade ago.

The post-pandemic surge in the revenue of engineering and construction firms — a proxy for new asset creation — has ebbed. This fiscal year’s government target for new roads is the smallest since 2018, according to India Ratings. Slow-moving irrigation and drinking-water projects are locking up working capital, while margins are getting squeezed in construction of factories and buildings. Contractors are, therefore, cautious about borrowing.

Then there are heightened global uncertainties. Like their peers elsewhere, business executives are waiting for July 9, when the Trump administration’s pause on reciprocal tariffs will end. If Washington and New Delhi are able to pull off a trade deal ahead of the deadline, Indian exports may avoid a 26 per cent tax in their biggest market. That is when bankers in Mumbai could finally start getting calls for higher working-capital funding limits and new term loans.

Until then, private credit will rule. Global asset managers, sovereign wealth funds, insurers and banks are actively chasing Indian business owners who are looking either to refinance existing loans, pay for acquisitions, or preserve their control. What the economy needs, however, is credit that helps create new assets. There’s littlesign yet of such a virtuous cycle getting started.