MUMBAI/NEW DELHI: The draft guidelines released by the Reserve Bank of India (RBI) recently, calling for higher asset provisioning for infrastructure lending, could hit the pace of infra development in the country, say companies, but agree that it is a “sane” move for the sector’s long-term stability.
The draft norms, which propose to increase the standard asset provision to 5 per cent even for existing loans, have already caused a stir, with commercial banks planning to write to the RBI and seek a review.
“This will prove a hurdle for the infra development projects envisaged for the next decade by the central and state governments. This will not be a priority sector for banks as higher provisioning will cause stress for bankers. I also see a larger impact on EPC (engineering, procurement, and construction) and real estate companies, which are primarily dependent on debt. This will have a ripple effect on the growth of financial institutions, which have demonstrated stable performance with financing projects and driving economic growth,” says Shivdutt Das, executive director, Vishwa Samudra Group, which is engaged in various infrastructure projects, including roads.
On any anticipated rise in finance costs for road projects, he adds: “To manage a balance between the profitability of the bank and the load of reserve ratios, they may not bring this at the project level but spread it across sectors or overall book, giving minimal impact to one specific sector. Infra ticket size is something every bank wants.”
Arun Maheshwari, joint managing director and chief executive of JSW Infrastructure, says: “In the near term, it may impact investments flows and lead to project delays. But it will bring sanity and rationale for long-term stability of the sector, probably learning from previous investment cycles in other sectors (power, steel, etc). The present pains will have long-term benefits, though they should have been advised with a timeline, as projects are conceived with current policy continuity assumptions.”
While some other executives from the power industry say it may be too early to gauge any impact, some highway contractors refuse to comment on the move.
Responding to a query on the impact of the proposed RBI norms on overall capex cycle, R Shankar Raman, chief financial officer for Larsen & Toubro, says: “I do not expect it to hamper or delay the capex cycle of the country. We are still not a country rolling in the riches; we need to allocate resources judiciously. Trying to be cautious is not a bad thing. Project failures may come down.” He does not expect any impact specifically for his company: “L&T does its own checks and controls on whether the project sponsor is fully funded, and the size of its operations, before accepting an order,” he says.
A senior executive of a highway operating company and member of a leading highway association, who does not wish to be named, tells Business Standard: “We are still assessing the impact on the road sector, but a prima facie reading indicates stress for some highway developers. We will convene on this issue soon and decide on what representation we will make to the government, if any has to be made.”
However, highway developers also feel that the norms may lead to weeding out of non-serious players, which is good for the sector, which needs measures to protect players with skin in the game.
Since the introduction of several relaxed norms in the past by the Ministry of Road Transport and Highways, the highway tendering of the National Highways Authority of India has seen increased competition, with the average number of bidders in tenders going up, according to several sector experts. This has led to the entry of many non-serious sub-contractors, raising concerns on the execution ability of some companies.
The power transmission sector, which is another long-term financing infra sector, is expecting an increase in the cost of financing, which might not reflect in tariffs immediately. Senior sector executives say the transmission industry will submit a consolidated commentary to the RBI with their opinion. “Every sector wants a robust financing universe. But the changes should not impact the final cost, of electricity in this case. The sector will submit its views to the RBI soon,” says an executive asking not to be named.
For power generation, it is a net positive, says an executive, as sector majors like NTPC will benefit from the new rules. “Given that smaller players are no longer there in the sector, and to avoid a repeat of the NPA (on-performing assets) scare, the sector was looking forward to such stringent rules,” says an executive of a private power generation company.
Source: Business Standard
