In 1995–2007 senior debt accounted for 68 percent of project financing on average. The rest took the form of equity (25 percent), subordinated debt (3 percent), and government grants (4 percent), typically “viability gap” grants provided during construction to PPPs deemed economically desirable but not financially viable. Of the senior debt, about 70 percent was provided by commercial banks, four-fifths of this by public sector banks. The rest of the total debt financing came from institutional lenders (around 23 percent), with 5 percent provided by the International Finance Corporation. Bond markets were used sparingly. The use of subordinated debt also remains limited... In recent years the role of senior debt has grown while the share of equity has declined, leading to rising debt-equity ratiosThe biggest concerns are the limited role played by bond markets and foreign capital, the two most desired forms of private capital. Another important concern is that the largest source of funding, forming nearly 50% of the total financing, is public sector banks. To put the problem in its perspective, in 2009 bank credit to infrastructure was Rs 2699 billion while the amount raised by corporate bonds was a mere Rs 5.4 billion. These go against the trend in developed and most other developing countries, where private sources and bond markets are the biggest source of capital. India's PPP financing pattern effectively becomes a case of "backdoor public financing".
These trends persist even today. The share of bank finance extended to infrastructure sector as a share of total bank finance has grown from 2.2% in 2001 to 13.4% in 2011. Most banks have reached or are close to their upper limits on infrastructure lending. Given the long-term nature of these loans, asset-liability mismatches are showing up in the balance sheets of all banks. Further, given the environment of crony capitalism that has enveloped larges swathes of the economy in recent years, especially in rent-thick infrastructure sectors, it may not be a surprise if significant share of the loans from public sectors banks are of questionable nature like this.
While debt-equity ratios have been consistently rising on the back of increased willingness of banks to give commercial loans, there may be some cause for concern with the trend of using the Government of India's viability gap funding as a form of equity,
While the evidence is inconclusive, there are some indications that lenders and developers view grants as substituting for the equity infusion needed during construction. The few projects involving a negative grant—a payment by the PPP to the government—also have a higher ratio of senior debt to equity, suggesting that these payments are being financed by debt borrowed by the PPP project.