Covid-19 impact: New lending formula for road projects on the anvil

The government is looking at an average of the marginal cost of funds-based lending rates, or MCLRs, of several lenders for road construction projects

The Union government is working on new norms on lending for hybrid-annuity projects after operators suffered losses due to pandemic-induced lockdown.

In order to reduce risks in road construction projects and also cushion banks, the government is looking at an average of the marginal cost of funds-based lending rates, or MCLRs, of several lenders for such contracts.

This would spread the risks in a project over multiple banks as distinct from one bank, which happens now.

The MCLR is an internal reference rate for banks fixed by the Reserve Bank of India.

Under the hybrid-annuity model (HAM), the Union government provides 40 per cent of the project cost and the successful bidder the balance.

The highway developer will receive two instalments for 15 years.

Construction companies raise funds from banks, which offer loans at their respective MCLR. The difference between the bank rate — the rate at which the RBI lends commercial banks — and the MCLR is the bank’s income.

According to an industry expert, the difference between the bank rate and MCLR has increased from 1.5 percentage points to 2.8 percentage points over the past few years.

While the bank rate has largely remained the same, the MCLR has increased because of increased pressure on bank finances. This has led to a higher borrowing cost for construction companies.

These measures are being considered after highway developers raised concern over future projects’ viability.

“The widening gap between the bank rate and MCLR has led to more conservative bids coming in HAM projects,” said Jagannarayan Padmanabhan, director and practice leader for transport and logistics, CRISIL Infrastructure Advisory.

Besides the changes in lending patterns for road developers, the government is also looking at a relaxed exit clause for the companies.

Currently, they can exit two years after the commercial operation date (COD). The new clause proposes exit for the developer after one year.

“These moves will help road developers to monetise projects soon after the COD,” said Padmanabhan.  

A dispute resolution mechanism is also being planned for each project to address issues that come up between the government and project operators.

The percentage of HAM projects in the overall project mix of the National Highways Authority of India (NHAI) has been 40-45 per cent in the past few years, with government-funded EPC (engineering, procurement and construction) contracts and build-operate-transfer projects having an equal share.

The NHAI has awarded 6,670 km under 119 HAM projects between 2015 and 2016, when this model was introduced, and 2018-19.