Timeline extension on project execution, release of bank guarantee to boost liquidity in construction sector: ICRA

Extension of up to six months in the timelines for work completion of highway projects and partial release of bank guarantees (BGs) will give a relief to construction firms and boost the developers' ability to bid for new projects, rating agency ICRA on Friday said.

Unveiling the first tranche of mega economic package on wednesday, Finance Minister Nirmala Sitharaman said all central agencies will provide an extension of up to 6 months to contactors without levying any additional cost or obligation on them for completion of work.

This extension will cover all central agencies like -- Railways, Ministry of Road Transport and Highways, Central Public Works Department, etc.

Other measures for contractors include an extension of up to six months in the timelines for work completion, intermediate milestone, and extension of the concession period in the PPP contracts.

"ICRA expects the recent measures announced by the Finance Minister for the contractors - primarily extension of the timeline for project execution by up to six months, and a partial release of bank guarantees (BGs) - to provide some respite to the construction companies," ICRA said in a statement.

It said partial release of BGs (to the extent contracts are complete) is a positive step and can help release some liquidity for contractors which is blocked in the margin money against these bank guarantees.

Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA, said BGs play an essential role in the contract execution and a sizeable quantum of BGs are required by contractors, therefore non-availability of adequate BGs can constraint a contractor's ability to bid for projects or efficiently execute projects."
Jain added: The total outstanding bank guarantees for construction and infrastructure sectors is estimated to be in the range of Rs 4 to 5 lakh crore. A release of 5 per cent of these guarantees can provide contractors a liquidity of Rs 2000-3000 crore and increase their ability to take up new projects worth Rs 2 lakh crore."