Slow rate cut transmission hurting returns on HAM projects: India Ratings

Slow transmission of the RBI-prescribed bank rate cuts in project lending rates will impact debt service coverage ratios in operational hybrid annuity model (HAM) based projects, says India Ratings.

The RBI has slashed repo rates by almost 200 basis points since June 2019 from 6.25 per cent to 4.25 per cent to ensure availability of cheaper credit.

However, the transmission of the reduced rates has been limited, with key non-banking finance companies having barely reduced the long-term prime lending rate.

"A sluggish transmission in project's interest rate was not originally envisaged by developers during the bidding stage and therefore may also impact their equity returns," the ratings agency said.

According to the agency, while the bound concessions receive grants on a timely basis, a concession grantor with a weak credit profile, late annuity payments combined with delayed transmission could pose a risk to HAM projects.

"The NHAI plans to release monthly grants proportionate to the completion of project construction, and the agency believes this will have a salutary effect on the working capital requirements of developers," IndRa said.

It further said that the developers of under-construction projects, who have availed mobilisation and working capital advance from the National Highways Authority of India (NHAI), are likely to register nominal savings in interest costs during construction.

The average one-year marginal cost of funds-based lending rate (MCLR) of public sector banks and private sector banks reduced by 84 bps and 56 bps, respectively.

Conclusively, during the 12 months ended May 2020, the transmission of the bank rate cut to MCLR has been higher for public sector banks at 42 per cent than 25 per cent for private banks.

"A 200 basis points expansion in the spread between the bank rate and the applicable MCLR on Ind-Ra rated HAM projects (assuming no MCLR cut) could lower the average debt service coverage ratio by 0.12 times and equity internal rate of return by 530 basis points. However, the impact on average DSCR and equity IRR will be lower in the event there is a 40 per cent transmission," the agency added.

According to India Ratings, the developers of under-construction projects, who have availed mobilisation and working capital advance from the NHAI, are likely to register nominal savings in interest costs during construction.