Lenders may reject NHAI fund to revive Rs 450 bn road projs

Government intervention of one time funding to revive languishing highway projects will be beneficial for about 50 projects worth Rs 450 billion but lenders may be hesitant for such assistance, India Ratings and Research (Ind-Ra) said today. The Cabinet Committee on Economic Affairs (CCEA) last week approved one-time financial assistance for "physically incomplete and languishing" highway projects. "The CCEA approval for one time financial assistance by National Highway Authority of India (NHAI) to revive and complete languishing national highway projects will be positive for around 50 projects, with total cost of Rs 450 billion," Ind-Ra said.

Out of the total languishing highway projects as on November 1, 2014, which have completed 50 percent of construction, Ind-Ra estimates that 30 percent are BOT (Build Operate Transfer) annuity based projects and the balance 70 percent are toll projects. Ind-Ra believes that developers and lenders to the projects however may be hesitant for such funding by NHAI, due to the clause of first charge by NHAI on the toll/annuity receivables of these projects over the senior lenders debt service. "Empirical evidence suggests that even in case of infrastructure debt funds, under non-banking financial company mode, existing lenders were reluctant," it said.

The rating agency said funding shortfall may not be the only reason for languishing projects, but also delays in getting the appropriate approvals and clearances from various government agencies. While this has resulted in project deferrals and cost overruns, the same has further increased the stressed loans in the banking system, it said, adding that hence one-time funding may not help all stranded projects, but only those that needed financing. Bank credit to the infrastructure sector grew at a compound annual growth rate of 39.5 percent in the last 14 years.

"Outstanding bank credit to the infrastructure sector stood at Rs 10.07 trillion in March, 2015 compared with Rs 95 billion in March, 2001...infrastructure constituted 15 percent of total advances of scheduled commercial banks, but had a much larger share of around 30 percent in total stressed advances," it said. After steel sector, roads account for the second largest amount of bad loans for the banking sector. "Therefore, the lenders already with high exposure to these languishing projects may find it difficult to accept NHAI's offer... wherein the toll/annuity receivables of the project would be ensured for NHAI through execution of tripartite agreements between the senior lender, concessionaire and the NHAI," it said. However, the successful implementation of recent measures by the government for bringing stalled projects back on track may give a fillip to the road sector, as this may push up average daily road construction, which has dropped to 4.1 kms in FY15 from an all-time high of 7.4 kms in FY13, it said.