With many highway projects finding it difficult to reach financial closure, the government is seeking a review of guidelines for lending to such projects. The finance ministry and the Reserve Bank of India are considering a proposal under which banks could treat escrow accounts as collateral for projects where annuities are not backed by a government guarantee.
The existing Model Concession Agreement (MCA) allows 90 per cent of the debt due as a secure guarantee, as the companies can recover it through toll collections. Banks are allowed to treat annuities and toll collection under the build-operate-transfer model as tangible securities but the finance ministry is concerned if the project fails to kick off due to some hurdles, leaving no revenue visibility for the borrower, banks can’t recover the loan.
The road transport & highways ministry has made a pitch for treating 90 per cent of the loans by banks as secure in line with the MCA developed by the National Highways Authority of India.
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“There are sectoral exposure limits and issues like what is a secure loan and unsecured loan. We have just started this dialogue and we are going to approach the RBI through the department of financial services,” A K Upadhyay, road transport and highways secretary, told Business Standard.
A finance ministry official, on the other hand, said companies should secure the project before bidding as people often faced problems in land acquisition later.
“Suppose you bid and win the project but later there are problems in land acquisition, how are you going to repay the loan?” he said. The issue was recently discussed in a high-level meeting on infrastructure attended by officials from the Planning Commission, lenders and the government departments concerned.
Bankers said if it was a government property such as the Delhi Metro Rail, they could not keep it as collateral as it was not saleable. They can treat annuities and toll collection as secure, provided they are backed by a government guarantee. Banks suggested escrow accounts be kept as collateral, said a top executive with a state-run lender.
Analysts agreed with the road ministry’s argument that the RBI and the banks should consider highway projects and other infrastructure projects as special assets.
Vishwas Ugirkar, senior director and partner with Deloitte Consulting, said the banking industry should make the necessary changes at least in cases where the government or a government agency such as the NHAI was a signatory.
Bankers argue lending to such projects increases the risk of bad assets in their balance sheets if the companies start defaulting. However, the highway construction industry maintains the default rate from the sector is negligible.
“Default level in roads is almost nil. The problem would be that they are not interested in investing more in this sector,” said the director general of the National Highway Builders Federation, M Murli, adding 50 major developers had taken a lot of loans and had a lot of projects already with them. He said the availability of funds from sources like private equity and foreign direct investment, too, had come down significantly.
“The problem is not peculiar to this sector. Many other sectors have faced it, like the steel industry in the early 90s”, Ugirkar said. As this sector had seen significant growth, it was facing issues, he added.
