RBI prudential norms on advances to infrastructure sector

RBI softens infrastructure financing norms 

Till now, RBI classified loans to infrastructure annuity project as secured loans but loans to BOT (toll), PPP project as unsecured.  The only 'security' that the bank had in case of BOT ( Toll )1, PPP projects was the Model Concession  Agreement ( MCA) and other similar agreements that specified the rights and obligations of the government and the developer. This kind of guarantee by project authority was considered as secured by Rating agencies but not by RBI.

RBI vide notification dated March 18, 2012 allowed that in case of PPP projects, the debts due to the lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, if they meet certain conditions

The conditions include that the user charges, toll, or tariff payments are kept in an escrow account where senior lenders have priority over withdrawals by the concessionaire and there is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated. Among other conditions, the lenders are required to have right of substitution in case of concessionaire default and also to trigger termination in case of default in debt service; and upon termination, the project authority has an obligation of compulsory buy-out and repayment of debt due in a pre- determined manner.

Explaining the reason behind the move, RBI also said, “It has been brought to our notice that most of the projects in India are user-charge based for which the Planning Commission has published Model Concession Agreements (MCAs). These have been adopted by various Ministries and State Governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders regarding security of their debt”.

Analysis of Impact

1.    Classification of loans to PPP project as secured may impact PPP projects worth Rs 10,000 bn

Total Infrastructure financing for the 12th FYP	Rs billion
Total requirement	56,000
Expected private participation including PPP (48%)	27,000
Assuming 70:30 debt equity ratio scenario, the private sector has to manage	18,900
Conservative estimate	10,000

2. Amount of capital written off for 'doubtful' assets is 100% for an unsecured loan and it's just 20% for a secured loan to the infrastructure sector, so Banks will now have five times as much of a capital cushion than they would otherwise have had. This will increase liquidity and bank’s ability to finance more in the infrastructure sector.

3.  Classification of loans to PPP projects as secured will also attract other players including insurance companies to invest in such projects

4.  As per Planning Commission interest rates for PPP projects would likely come down by about 100 basis points.      

     

In case of  BOT (toll) model, the developer has to recover his investments through toll collection. Depending upon the viability of the project, he may ask for a viability gap funding (currently capped at 40% of the project cost) from the NHAI or may agree to share revenues with the NHAI, whereas in case of  BOT(annuity) model, no viability gap funding (VGF) is made available to the developer and he has to bear the entire project cost. The project investment cost is recouped by the developer through annuity payments made by NHAI after the construction is over while the toll collected goes to the NHAI.