Roadmin asked to seek Rangarajan advice on classification of bank loans

Written by Timsy Jaipuria | New Delhi | Updated: Dec 7 2012, 09:22am hrs
Keen to boost credit flows to the road sector, Prime Minister Manmohan Singh has asked the roads transport and highways ministry to seek the advice of his economic advisory council headed by C Rangarajan on the ministrys demand for the RBI to classify the banks advances to the sector as secured.

In the absence of collateral, these advances are now treated by the RBI as unsecured, leading to a waning of lender interest in highway projects. The land on which a road is build belongs to the government and hence a concessionaire company cannot pledge it to the lenders as a collateral. The PMO has asked secretary, road transport and highways, AK Upadhyay, to send a note to Rangarajan on the issue. Singh asked his economic advisory council to look into the issue.

The government is also considering an amendment in the model concession agreement (MCA) for road projects to remove the restrictive cap of extension in the concession period by 20% if revenues fall short of targets. This, the highways ministry feels, would enable the RBI to classify the advances to these projects in the secured category. The decision was taken on Thursday after Singh reviewed the progress of various projects in the transport sector railways, roads and shipping.

Last month, the National Highways Authority of India (NHAI) discussed the problems in PPP projects in roads with the finance ministry and Planning Commission. A senior government official privy to the meet told FE that the department of financial services had agreed to take up the issue of classification of bank loans to road sector with the RBI.

Currently, there is a restrictive clause under the Article 29.2.1 of the MCA on the extension in the concession period by maximum 20% in the case of fall in the traffic/toll collection compared to the target traffic. This is an irritant as it prompts the banking regulator to keeps advances to the sector under unsecured category.

The Planning Commission during the discussion pointed out to the department of financial services that the concession period even with this cap would be much longer than the repayment schedule of the loan sanctioned by the bank, the interest of the banks stands fully secured, the official said.

NHAI chairman RP Singh highlighted that there is an implicit guarantee to the banks as per the current MCA to extent of 90% of the debt due in the event of termination of the concession even due to concessionaire default and therefore to such extent the accounts need to be classified as secured.

Experts say that once these changes come through it will a great relief for both the banks and road companies. Currently, developers are charged higher rate of interest by the banks on such advances since they are unsecured and once the classification changes then they will save on to 0.5%-1%, which in itself is substantial. Along with this, banks will now be less apprehensive to lend further to the road developers, said Vishwas Udgirkar partner, infrastructure, at Deloitte.