The decision of the Reserve Bank of India (RBI) to ease lending norms for the infrastructure sector is expected to help companies avail better and cheaper credit flow, besides getting access to new sources of funds.
In its monetary policy for 2010-11, RBI said annuities under the build-operate-transfer (BOT) model in road and highway projects and toll collection rights should be treated as tangible securities to offer secured loans. Another proposal was to reduce provisioning on infrastructure loan accounts classified as sub-standard to 15 per cent, instead of the current 20 per cent.
RBI also suggested that banks classify their investments in non-SLR (statutory liquidity ratio) bonds issued by infrastructure companies with a minimum residual maturity of seven years under the held to maturity (HTM) category, a decision which would spur investments by banks in such bonds.
“The decision on secured loans will bring down the interest rate burden in BOT projects, especially for roads and highways. I expect the decision will reduce interest rates by at least 0.2 per cent to 0.5 per cent”, said Praveen Sood, chief financial officer of HCC Ltd, a Mumbai-based construction company.
Industry sources said most infrastructure companies were finding it difficult to get secured loans from banks as rights, licences and authorisations of borrowers were not considered as tangible security for giving secured loans.
Most banks had also placed a cap on unsecured lending, depending upon fund availability and internal decisions.
According to RBI guidelines, loans to the infrastructure sector, especially, road, construction, telecom and ports, are considered unsecured loans, as there is no tangible asset that banks can acquire in case a borrower defaults.
However, industry sources are concerned about immediately availability of cheaper loans for the sector. “The decision will help us have more credit availability and flow, rather than cheaper credit in the near future,” said Shankar Raman, executive vice-president-finance, Larsen & Toubro.
He said L&T achieved financial closure for all its existing road projects and the decision would help smaller companies secure funds for projects.
The aim was to increase the flow of funds. Its argument was that since most BOT projects were in the public-private partnership (PPP) mode, the government was involved and so the chances of these loans turning into non-performing assets (NPAs) were remote. In most BOT projects, payments are operated through escrow accounts.
A decision on secured loans was a long-standing demand of the sector, especially in development of roads. The decision would pump in huge money into road development, said Sanjay Sethi, executive director (infrastructure) with Kotak Investment Securities.
“The government is planning to roll out road projects worth $10-12 billion (Rs 45,000-53,500 crore) in the coming year and has set a target of constructing 20 km roads every day. Each km of road will attract an investment of about Rs 10 crore,” he said.
Sources said RBI’s decision on non-SLR bonds would open a new avenue for raising money for infrastructure companies.
“With sectoral caps and single borrowing limits, companies will eventually have to tap this avenue. RBI is giving them another source to raise money,” said Issac George, chief financial officer of the GVK group.
Shankar Raman said the decision to reduce provisioning on infrastructure loan accounts was a clear indication by RBI to banks to step up credit to the sector. “Lower provisioning will encourage banks and give them more leeway to take more risk,” he said.