Rising lending by banks to build roads, ports and power plants is not necessarily in the best interests of lenders since more of it may stress their financials due to volatile cost of raising funds, Reserve Bank of India
The institutional structure of banks forces them to rely more on the current account and savings accounts, which for many banks constitute nearly half their total deposits. Even the fixed deposits tenure is mostly for one or two years. With this cost structure, lending for building ports and roads becomes risky when interest rates begin to rise as it is happening now. Most of these infrastructure projects take more than a decade to be built, keeping banks on tenterhooks.
Banks can lend for tenors of five, seven and 10 years, but infrastructure projects need finance for 12,15 and 20 years. This role would eventually have to be taken up by insurance and pension funds that have the funds but not the wherewithal to appraise risk. Right now, banks are financing infra projects. They are largely riding on a spirit of positivism, not much else.
Public sector participation in financing infrastructure has also come down which is the reason for the widening gap in funding.
The deputy governor also said the noise on infrastructure building is also diverting attention from other pressing needs of the economy such as manufacturing capacity expansion. The lack of capacity expansion is blamed for the surge in prices of manufactured products.
Building new capacity does not necessarily mean new competition, though scales of economies have definite advantages, the RBI deputy governor said. The increasing role of services in
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