Construction Boom Highlights New Financing Needs

Although the construction sector is noted for its high share of bad loans, it remains a favourite of banks

By Echelon.

Published on July 25, 2014 with No Comments

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Jonathan Alles, Managing Director, Hatton National Bank, recalls how difficult it was to get a guarantee for even Rs100 million in infrastructure financing in the early 2000s. Today, the typical quantum is around Rs 1 billion with the duration of projects stretching to 10-15 years. “The construction industry” he told the World Construction Symposium 2014 organised by The Ceylon Institute of Builders and Department of Building Economics, University of Moratuwa, “is one of HNB’s favoured industries.”

It was one of the sub-sectors with higher growth rates in the first quarter of 2014. However, construction was one of the sectors that saw increased bad loans, along with pawning-backed consumption, agriculture and fishing, and tourism, says the Central Bank. Excluding pawning, NPLs in construction were the second highest, after tourism in 2013. The regulator notes that a large part of bank lending is concentrated in five key areas of economic activity – with construction accounting for the second highest after trading.

HNB’s Alles says they financed Rs100 billion worth of projects in the past five years with a current exposure of Rs50 billion to the construction sector – about 10% of its loan book and close to the cap. HNB has collaborative deals with overseas export-import banks and export credit agencies and another $100 million more deals in the pipeline for which credit approval has been given.

Nevertheless, liquidity constraints still pose challenges, as projects are “getting bigger and bigger” he says. “We need to think of new structures to manage liquidity issues like longer tenures.”

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