Banks comfortable with funding new road projects but want to avoid toll-based models

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Bankers are willing to fund the selective hybrid annuity mode (HAM) road projects but are skeptical on the toll-operate models even as they grapple with large non-performing assets (NPAs) in the sector.

Three senior public sector bank officials who spoke with Moneycontrol said they are, in fact, getting more confident of giving loans to the new operating modes of projects but are not so sure about the annuity or the toll model where the repayments get stuck due to state government decisions leading to lower toll collections and lower promoter equity.

A senior Bank of India executive said, “As far as HAM projects go, we are largely safe as they are bound to make the repayments. In toll-based projects, there is always a risk involved. If the COD (commercial operational date) is not achieved, then there may be some political and other issues and also poor toll collections, due to which our repayments get stuck.”

Bankers' comments come a day after Union Transport Minister Nitin Gadkari pulled up banks for delaying financing towards the roads sector despite several clearances and faster movement of the projects.

“Three years ago there was a lot of problem with contractors and banks. There were defaults. At that time 403 projects aggregating Rs 3.85 lakh crore were stalled. And in 75 percent of the cases the government was responsible…Land acquisition, environment, forest clearance, etc., were the problems. Now, we have cleared all these,” said Gadkari at a summit on Monday.

In the new situation, Gadkari said he is expecting bankers and investors to support the projects implemented in the PPP (public-private participation) and BOT (build-operate-transfer) modes.

Till FY14, projects were awarded based on the BOT – Built-Operate-Transfer (toll) first, followed by BOT (Annuity) and then engineering, procurement and construction (EPC), depending on the traffic density along the project stretch.

Of late, HAM, a mix of EPC and BOT (Annuity) models, is implemented where government and private sector share the project cost (60:40).

HAM is currently the most preferred mode of awarding projects and about 53 percent of the awards in FY17 by NHAI were through this route, compared to 8 percent in FY16 and this is likely to increase further in 2017-18, as per ICRA Ratings agency.

Till March 2017, 43 projects, covering 2,641 km, have been awarded through the HAM (34 in 2016-17 and nine in the fourth quarter of FY16) route.

“Under HAM, the equity commitment from the promoter side is very low and hence the promoter has no skin in the project. Also, most bidders are less experienced in the developed market sector and so banks may not be comfortable lending to them. Also, going by the RBI data, the loan exposure as on July this year declined 6.8 percent to Rs 171,000 lakh crore as compared to Rs 183,500 crore,” said Shubham Jain Vice President, Corporate Ratings at ICRA.

Hence, no incremental disbursements have happened but what has been amortized, people are going through the bonds and NCDs route, he added.

In August 2016, the Cabinet Committee on Economic Affairs (CCEA) authorised the NHAI to monetise the public-funded National Highway (NH) projects that are operational and generating toll revenues for at least two years after the COD through the toll-operate- transfer (TOT) model.

A senior large public sector lender’s corporate head said, “Under PPP mode also, there are hiccups from the private sector, while HAM is a mix of annuity and EPC which we are comfortable but we are going selective as there are no large players bidding it in a few cases and also we are looking at where the project is taking place and lending accordingly.”

Despite the government’s assurance, given the rise in NPAs and the mammoth clean-up exercise, bankers prefer to take more precautions than be sorry at a later stage.