Funding woes of the construction sector are likely to worsen as risk-averse lenders are reluctant to extend credit to players despite a growth in their order books. The increase in order book of construction companies is not backed by a corresponding increase in credit limits, said India Ratings. The ratings agency has changed its outlook for the sector to 'negative' for 2020-21 from 'stable'.
Bank credit remains one of the biggest issues plaguing the sector. Lower-rated and highly-leveraged entities consequently have even more trouble in accessing funds. "The ratio of these (fund and non-fund) limits in relation to order books for higher-rated entities continued to decline. Sector participants at the lower end of the rating spectrum or those with highly-levered balance sheets might face difficulties in obtaining enhancements in their working capital limits. This could hamper their ability to execute their order books in a timely manner, or bid for new orders over FY21," the ratings agency said. The disparity is particularly visible in BBB-rated companies.
The perceived risk of the construction sector is relatively high, and banks, especially those under the central bank's Prompt Corrective Action (PCA) framework, have to cut their exposure to higher-risk lending. This has resulted in slow bank credit growth in the construction sector, one analyst said. Meanwhile, the utilisation of existing limits as a percentage of sanctioned limits was static in FY19, compared with the previous financial year.
As a result of these constraints, the government is now contemplating allowing insurance companies to provide insurance cover for construction projects. The move is likely to reduce risks associated with completion of construction projects, the analyst said.
The government recently announced a Rs 102 lakh-crore National Infrastructure Pipeline (NIP), which is expected to boost order inflows in the medium term, Ind-Ra said. Order inflows in the next financial year will be driven by government expenditure.
The gross budgetary support for the transportation sector for FY21 is up 8% year-on-year at Rs 1.7 lakh crore. The agency expects an uptick in order inflows for the roads segment as well in the next fiscal as the government has allocated 20% of its outlay under the NIP for the sector. In the current financial year, order inflows from the National Highways Authority of India and the state governments have been muted. Additionally, orders for projects worth around Rs 6,100 crore were cancelled in Andhra Pradesh.