India’s infrastructure sector, once known for its stressed bank assets and stalled projects, has finally successfully diversified its financing ecosystem, making it less dependent on traditional bank credit.

A decade after the famous 2012-13 ‘House of Debt’ report by Credit Suisse warned about the high debt levels of India’s infrastructure conglomerates, the sector has now been redefined thanks to policy shifts, new investment vehicles and cleaner balance sheets.

According to the latest Economic Survey, India’s infrastructure financing landscape’s shift from a "historical dependence on bank credit toward a diversified ecosystem of alternative financing vehicles and capital market instruments" is timely.

The clean-up of legacy stressed assets is nearing completion, replaced by a trillion rupees plus mature market for alternative assets.

A series of debt resolution policies, infrastructure project re-modelling, introduction of alternate finance instruments and a host of distressed asset acquisitions have ensured that the infrastructure financing eco-system in India has finally come of age.

The Run-Up To Debt

In the 2012-13 era, the sector was plagued by issues like huge funding demands of large public-private-partnership (PPP) road projects, uncertainty over fuel sourcing for power plants, infrastructure conglomerates spreading themselves thin with debt-heavy ambitions, and limited possibilities to source funding for a sector where operational assets were still nascent.

“The bulk of legacy stressed assets have been sliced up and monetised, barring some scattered pending litigations,” Gahan Singh, a Partner in the Energy Infrastructure and Resources Practice Group at Khaitan & Co, told The Core.

Assets Under Management (AUM) for Infrastructure Investment Trusts (InvITs) reached approximately Rs 6.28 lakh crore in fiscal 2025, growing at an 18% CAGR since 2021. Roads account for nearly 40% of this value.

The National Highways Authority of India (NHAI) has raised nearly Rs 49,000 crore through the Toll-Operate-Transfer (TOT) model as of FY25.

The IL&FS group has repaid Rs 48,463 crore to lenders as of September 2025, reaching nearly 80% of its resolution target.

Risk Redistribution

A key distinguisher from a decade ago to now is also how infrastructure projects are funded and executed with more distributed risks.

While the old Build-Operate-Transfer (BOT) models, where private players bore the brunt of land acquisition and traffic risk, newer models like the Hybrid-Annuity Model (HAM) have restored lender confidence. “Furthermore, the players have avenues available to monetise completed HAM assets, which provides comfort to their balance sheets,” noted Anand Kulkarni, director with Crisil Ratings.

For instance, execution risks related to land and other initial acquisitions are now managed by the government by breaking single projects into different packages.

Executive risks are divided among multiple players, and in the absence of large-scale BOT projects, operational revenue risks are again with government bodies.

As seen in many recent metro projects, government funds have been doing the heavy lifting for new infrastructure projects. Private capital now often flows to operational projects through InvIT and TOT, allowing government bodies to recycle it for new infrastructure development.

“…. options like harmonious substitution for under-construction projects help address stress without having to wait for a default to happen,” Singh from Khaitan said.

Harmonious substitution allows an amicable solution to bring in a new developer to take over and complete an under-construction road project, in case the current developer is struggling.

Stronger Balance Sheets

Rating agencies believe that despite the expected absolute increase in infrastructure-related debt, interest coverage ratios, or the ability to service debt in multiples, will remain comfortable. “Leverage ratios have shown improvement over the years,” said Kulkarni.

Rating agency ICRA expects the interest coverage ratio for the construction industry to remain adequate at 3.6–3.9 times in FY26.

The Economic Survey said that credit flows from non-bank financial companies (NBFCs), net of bank borrowings, to the commercial sector grew at a robust compound annual growth rate (CAGR) of 43.3% between FY20 and FY25.

Even specialised lenders are seeing a turnaround. India Infrastructure Finance Company (IIFCL), an infra-focused financer, reported that its non-performing assets (NPA) dropped to sub-1% in FY25, down from levels as high as 20% in FY20.

These are indicators of an improved debt profile and diversification of funding options.

In the latest budget announcement, the government also earmarked a record Rs 12.2 lakh crore as capital expenditure outlay, of which historically, infrastructure has been a large beneficiary.

This has been the capital outlay trend for the last three-four years. Individually too, reflective of the boom in infrastructure creation, absolute debt numbers for the sector have been on the rise.

The Road Ahead

While the sector may have shed its “house of debt” tag, the sector by nature will continue to see localised financial stress, albeit things will vary for sub-sectors.

For example, subdued highway execution may keep revenues flat for some Engineering, Procurement, and Construction (EPC) players through 2026.

However, Kulkarni is confident that the leverage profile of these players remains comfortable, owing to their efforts over the last five years to monetise assets and/or raise equity, which has helped strengthen their balance sheets.

Another game-changer for the years to come will be the resolution framework of the Insolvency Bankruptcy Code (IBC).

“Stress is inevitable in the infrastructure sector… however, under the new framework, it can be arrested early in a timely manner,” said Singh.