India’s infrastructure push hits funding crunch as banks retreat

By: Team India Tracker

The government is racing to meet its infrastructure goals, fast-tracking job-creating projects even as long-term credit shrinks and banks pull back from funding long-gestation ventures

India’s building spree—from expressways to solar parks and metro lines—has become the backbone of its growth story. But the country’s drive to modernise is running up against an old problem: who will pay for it. 

The government is pushing hard to deliver on its infrastructure promises, fast-tracking projects that can boost jobs and productivity. Yet the flow of long-term credit—the kind that keeps construction cranes busy for years—is drying up. Banks, once the main source of infrastructure funding, are scaling back their exposure to long-gestation projects. In their place, non-banking finance companies (NBFCs) are stepping in, but at a steeper price. 

Building modern infrastructure demands not just capital but patience. And patience, it turns out, is in short supply in India’s banking system. 

According to the Centre for Monitoring Indian Economy, banks’ share in total infrastructure financing has fallen to 33.6 per cent, the lowest since FY2018. Between March 2020 and March 2025, that share slipped from 50 per cent to 42 per cent, while infrastructure-focused NBFCs expanded their footprint. 

These specialised financiers have helped keep project pipelines alive, but their borrowing costs are higher. That extra expense flows downstream, making infrastructure development more expensive overall. 

Banks’ caution stems from a structural mismatch: their funding base is mostly short-term, while infrastructure loans stretch over a decade or more. Nearly 90 per cent of bank deposits now mature within three years, limiting their ability to commit to long-duration lending. Analysts say NBFCs and new institutions like the National Bank for Financing Infrastructure and Development (NaBFID) are better positioned for such lending—but their cost of capital is steeper. 

Power dominates, other sectors lag 

As of FY25, more than half of outstanding bank credit to infrastructure is concentrated in the power sector, leaving smaller slices for roads, telecom, and ports. The focus on energy reflects India’s push to expand renewables and strengthen its electricity grid. 

But that concentration has a downside. Critical areas such as railways, water systems, and urban transport remain underfunded, even though they are essential for sustaining urbanisation and economic competitiveness. 

Cleaner balance sheets, cautious lending 

There’s some good news: India’s financial system is healthier than it has been in years. The share of non-performing assets (NPAs) in total advances has steadily declined, helped by better recoveries and stricter underwriting standards. Balance sheets look cleaner, and capital buffers are stronger. 

Still, risk appetite hasn’t returned. Even as overall infrastructure lending slows, banks have increased the share of long-term loans within their portfolios. Such loans now make up 56 per cent of total outstanding credit in FY2025, the second-highest share in over two decades. But this only deepens the asset–liability mismatch—short-term deposits funding long-term assets—which keeps lenders wary. 

As one analyst puts it, the hesitation is “structural, not cyclical.” 

Capital price keeps rising 

NBFCs have filled part of the financing gap, but their reliance on market borrowings pushes up lending rates. Developers end up paying more, inflating project costs and squeezing margins. This growing cost of risk underscores the need for new channels of patient capital. 

The government is trying to broaden the pool. It has been promoting infrastructure investment trusts (InvITs), green bonds, and blended finance structures to attract institutional and foreign investors. These efforts are slowly gaining traction, but commercial bank credit remains vital—especially during the early stages of large projects when private investors tend to stay away. 

Without a stable mix of funding sources, India’s infrastructure boom risks losing steam just when momentum is most needed. 

The financing challenge is more than a budgeting headache—it’s a potential drag on India’s long-term growth. Power projects continue to absorb most of the available credit, while other essential sectors fight for scraps. Banks, constrained by short-term liabilities, remain reluctant to lend long. NBFCs fill part of the void, but at higher cost. 

Unless India develops a deeper and more diversified infrastructure-financing ecosystem, its growth ambitions could be constrained not by a lack of ideas or execution capacity, but by the high cost of capital. 

For now, the system’s strength lies in cleaner balance sheets; its weakness lies in risk aversion. Closing that gap—by building patient capital, encouraging institutional investment, and easing banks’ funding constraints—will decide how quickly India can turn its infrastructure blueprints into concrete and steel.