NEW DELHI: If the Reserve Bank of India’s (RBI) draft guidelines on financing of project loans gets implemented as proposed it would lead to a disruption in the highways sector, which has witnessed aggressive public capex over several years, and is expecting a return of private risk capital.
Many projects will have to go back to the drawing board for reworking of costs and concession models due to the RBI’s tighter norms, sources in the industry said.
According to analysts the impact of higher provisioning for projects in the construction and operational phase would lead to a 0.25% to 0.75% increase in borrowing costs of developers that in turn will have a cascading impact on the entire chain in the sector that saw an investment of Rs 3.01 trillion last financial year.
The RBI’s draft guidelines were released on May 3 for public comments and cover “Infrastructure, Non-Infrastructure and Commercial Real Estate” sectors. The last day for comments is June 15.
The guidelines clearly demarcate provisions to be made for loans by lenders in the design phase, construction phase and commencement phase and commencement of commercial operations. In the highways sector these would be applicable to projects developed by concessionaires under Hybrid Annuity Model and Build Operate Transfer Model (BoT).
Depending on the road stretch and the borrower, the cost of loans for road construction range between 8-11%. HAM accounts for around 30% of the highways awarded and this year the target of 10% has been set for BoT.
The government is making an effort to revive private investment through BoT. It made changes in model concession agreement to make this mode of highway construction more attractive. The NHAI was planning to come out with tenders for around 900 km of highway stretches to be awarded under BOT (Toll) by 2025-26. The new proposal of higher provisioning would add another layer of uncertainty among developers.
“Higher costs would also reduce the NHAI’s share in toll revenues of BoT projects,” Jagannarayan Padmanabhan senior director at Crisil said
The highways built under Engineering Procurement Construction (EPC) where the National Highways Authority of India (NHAI) fully pays for the construction would not be impacted much as these projects do not have stages like “commencement of commercial operations”. The other big spender on asset creation -the railways – too would escape the full impact of the guidelines as its projects are developed in EPC mode. The railways capital expenditure was Rs 2.4 trillion in 2023-24.
The draft guidelines propose an increase in provisioning for loans to projects in the construction phase to 5% from 0.4% at present. In the operational phase the provisioning for loans has been proposed at 2.5% wich can be brought down to 1% provided the project has a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and total long-term debt of the project with the lenders has declined by at least 20%.
The BOT (Toll) projects that have been operational for some time might escape the higher provisioning rule as their debt would have declined by 20% but the ones that have commenced operations recently will take another 4-5 years to get there, Vinay Kumar G, Vice President and Sector Head – Corporate Ratings, ICRA said.
The biggest impact of the RBI move will be felt in projects in the HAM mode. In HAM 40% of the cost is paid by the NHAI at the construction cost while 60% is contributed by the concessionaire. This cost is then reimbursed to the concessionaire over a period of 15 years Along with annuity payments the authority also pays interest at 3% over bank rate. Higher borrowing costs may force revision of the formula.
“The operational period for a HAM project is 15 years and sanctions generally have 13.5-14 years as repayment period translating to repayment tenor at above 90% of the economic life of the project. The revised regulations specify the repayment tenor, including the moratorium period not to exceed 85% of the economic life of the project, and would require revision in sanction terms for new HAM projects to align with the modified regulations. Given the compressed timelines for repayment, it is likely to increase the equity requirements for the developers to maintain similar credit profiles,” Kumar added.
If repayment period is compressed then it will have an impact on the bids by concessionaires, Jagan said.
Source: The Financial Express