Banks face funding and risk-balancing challenges for key infrastructure investments

Banks face funding and risk-balancing challenges for key infrastructure investments. In the context of Vietnam’s push for long-term infrastructure investment, demand for medium- and long-term capital is rising, while corresponding funding channels have not yet fully developed. In practice, many major projects such as the North-South Expressway, Ring Road 4, and power plants involve banks in a lending role. This shows that banks remain the main capital suppliers, but this also means the banking sector continues to face significant system-wide safety pressures. According to Dr. Nguyen Tri Hieu, the challenge is not only mobilizing funds but also allocating them efficiently, controlling risks, and rebalancing the financial market. What does he think about the role of the banking system in financing infrastructure projects, especially large-scale, far-reaching ones? In a market environment where the debt market, particularly corporate bonds, is not fully developed, the banking system continues to play a central role in supplying capital for infrastructure projects and the economy. In practice, many large-scale infrastructure projects have been implemented thanks to deep involvement by commercial banks, through direct financing or co-financing. The size of credit facilities is typically very large, and long tenors indicate a tight integration between the banking system and the infrastructure development process. Syndicated lending among banks not only helps meet capital needs but also disperses risk within the system. Viewed positively, bank lending plays a crucial role in ensuring project progress. In a context where other capital sources cannot keep up with demand, bank credit acts as an “instant conduit of capital,” helping projects avoid disruption. This is especially important for high-spillover infrastructure projects that directly influence growth and the economy’s competitiveness. Additionally, banks act as a market-based financial discipline mechanism. Through the credit appraisal process, banks require project developers to demonstrate clear project feasibility, especially cash flow generation and debt-service plans. This mechanism creates clearer financial discipline, forcing projects to be well-prepared and transparent. During implementation, this role is further manifested through cash flow monitoring and progress supervision. Banks not only provide funding but also closely monitor the project’s financial health, enabling early identification of emerging risks and prompting necessary adjustments when needed. From a broader perspective, the central role of banks in financing infrastructure also reflects the development stage of the financial market. However, this also means that pressure and risks are increasingly concentrated in the banking sector, requiring longer-term adjustments. It can be said that in the current period, banks not only provide capital but also help shape financial discipline and enhance investment efficiency. However, this role must be placed within a more balanced financial market structure to ensure the sustainability of the entire system. What opportunities does infrastructure financing participation bring to banks? Infrastructure projects offer banks several significant benefits. Infrastructure lending, if chosen and appraised properly, can generate stable long-term income. Moreover, major projects often involve government participation or support, providing relatively higher stability compared to many other sectors. This allows banks to confidently extend mid- and long-term credit, as risks are better controlled, especially in a volatile business environment. Linking financing to strategic projects also helps banks align with the economy’s overall development direction. Another notable benefit is that involvement in financing large-scale projects can enhance a bank’s reputation and standing. Participation in key projects demonstrates financial strength, governance capability, and the capacity to engage in large transactions, which can strengthen market image, expand client relationships, attract partners, and boost competitive advantage. In many countries worldwide, banks’ involvement in infrastructure financing is a common trend. However, banks’ roles are typically seen as complementary to other long-term funding channels to ensure risk balance and avoid over-reliance on bank credit. It’s important to recognize that benefits and risks always go hand in hand. Large, long-tenor credits, if not managed properly, can become potential risks. If projects are delayed, incur cost overruns, or fail to meet expectations, the pressure can spill over to the banking system, especially when such loans make up a large portion of credit portfolios. Therefore, to ensure sustainable capital for infrastructure financing, strengthening capital bases is essential. At the same time, the government should participate as “seed capital” in a reasonable proportion to share initial risk and attract more resources from the private sector, reducing pressure on the banking system. There is also a need to develop long-term funding channels. A sustainable financial system cannot rely too heavily on bank lending; there must be a balance between banks and the capital markets. Expanding the bond market and encouraging participation from long-term investment funds and non-bank financial institutions are necessary steps to diversify funding for the economy. In the context of large-scale infrastructure projects with long payback periods, risk diversification is also crucial. A syndicated lending approach among banks should be strengthened not only to meet capital needs but also to avoid risk concentration in a few lenders. This approach is widely used in many markets to enhance system safety. Moreover, strengthening the legal framework for long-term funding tools, such as infrastructure bonds or tailored financial structures that suit infrastructure characteristics, will contribute to creating additional funding channels. When these tools are developed, part of the financing burden can be shifted from banks to the capital markets, easing pressure on the credit system. On the banks’ side, there is a need to enhance internal capabilities, especially financial strength and the ability to mobilize long-term funds. A key change is to shift from collateral-based credit assessment to evaluating a project’s cash flow. This factor is decisive for the sustainability of infrastructure loans with long payback periods. In addition, improving risk governance and building robust data systems is crucial. With good data and appropriate models, banks can identify risks earlier and respond more proactively to market changes. For bank funding to sustainably accompany infrastructure projects, there must be close coordination between government direction and the capacity of the financial system. The goal is not only to ensure capital for growth but also to maintain stability and safety of the entire financial system. Thank you!