'Regulatory norms may pose credit challenge for Indian airports'

India's major airports are witnessing a strong rise in passenger traffic but the new and evolving regulatory regime for airports may pose a credit challenge, Moody's Investors Service said in a recent report.

" The Airports Economic Regulatory Authority of India (AERA) has approved tariffs for most airports only for the first five-year regulatory period. Additionally, the terms and conditions stated in concession agreements have been different from those stipulated under the regulatory act on certain key issues, leading to frequent misunderstandings," the rating agency said in a report.

Moody's conclusions are contained in its recently released report, "Airports -- India, Traffic growth credit positive, but regulatory environment a challenge".

"The two years of growth in domestic air traffic has made India the third largest domestic aviation market after the US and China, and the main drivers of passenger volume growth include a rising middle class, lower air ticket prices and improving regional connectivity," the report said quoting Abhishek Tyagi, Moody's Vice President and Senior Analyst.

Tyagi added that air traffic growth is expected to be moderate but still remain healthy at 8%-10% annually over the next two years as compared with much lower growth in other countries in the region

Moody's expects large airports in India to bring forward plans to expand capacity to meet growing demand, but the scale and complexity of expansion projects may affect the airports capacity to manage unexpected challenges, such as a sharp cut in tariffs.

"This situation would reduce revenues and cash flow, and limit the airports' flexibility to defer spending once any expansion work commences," Moody's said.

The Indian government in a bid to boost regional tourism and economic growth launched the National Civil Aviation Policy 2016 plan (NCAP 2016).

The policy will accelarate the growth of an integrated aviation system and includes a regional program called UDAN (Ude Desh ka Aam Nagrik), which involves connecting unserved and underserved airports.