Secured tag for advances on road projects in PPP mode

RBI has agreed ?in principle? to treat advances to the sector as ?secured’ on the strength of the National Highways Authority of India’s?sovereign guarantee?.

In a move that could boost banks’ confidence in lending to road projects, the RBI has agreed ?in principle? to treat advances to the sector as ?secured’ on the strength of the National Highways Authority of India’s (NHAI) ?sovereign guarantee?.

Currently, advances to road projects developed in the public-private partnership mode are treated ?unsecure? in the absence of any ?tangible security?, given that roads are public property and the companies concerned don’t own them.

The RBI’s move follows the department of financial services (DFS) urging it to amend the relevant guidelines and treat such lending as ‘secured’ in cases where NHAI gives guarantee for 90% of the debt if the promoter defaults. The RBI had earlier insisted on a sovereign guarantee for the entire debt. NHAI’s guarantee will now be treated as sovereign guarantee. Once RBI notifies this status change, the credit flows to the fund-starved sector could grow by at least 20%-25%. The advances to the sector won’t undermine investor confidence in the balance sheets of the lenders either.

The current RBI norms say in order to determine the amount of unsecured advances in the balance sheet of banks, the rights, licences and authorisations charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be treated as tangible security. This has troubled banks as well as promoters of companies involved in highways projects and the NHAI because unsecured loans need more provisioning than secured lending and are subject to higher capital adequacy norms. This in turn increases the cost of funding for these projects and reduces the quantum of funds that can be kept aside by banks and financial institutions for such lending.

Banking industry sources said even if some banks on their own treat these loans as ‘secured’, they would face difficulties in justifying such a stand during accounting processes.

The chief of a leading public sector bank said, “though the respective boards of banks can decide how much unsecured advances they want to lend, investor confidence will be shaken if there is more unsecured lending on the banks’ balance sheet. This is where categorization of such loans as ‘secured’ will help the ratings of the banks.”

Given the liquidity crunch in the system, NHAI chairman RP Singh ? during discussions with the Finance ministry and RBI ? highlighted that ? as per the model concession agreement there is an implicit guarantee to the banks to the extent of 90% of debt due in cases of termination of the concession even due to the concessionaire’s default.?

Therefore, the accounts need to be classified as secured to such an extent, Singh said.

Given the thrust on infrastructure sector, especially on expediting the completion of highway projects, the PMO was also in favour of categorising loans to highway projects as ?secured?.

As per the RBI’s current norms, banks can treat as ‘tangible securities’ the annuities under build-operate-transfer (BOT) model of road/highway projects as well as the toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved. Treatment of annuities and toll collection rights as tangible securities is, however, subject to the condition that the right of the banks to receive annuities and toll collection rights is legally enforceable and irrevocable.

Citing these guidelines, the RBI had said that there was no need to bring in anymore explicit changes. However, bankers said they will still have problems during accounting scrutiny if lending to highway it is not termed ‘secure’. ?We had asked the RBI to issue a clarification regarding this so that banks are comfortable. The RBI has told us they are positively considering the matter and will soon issue the required clarification,? a finance ministry official said.

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First published on: 19-03-2013 at 03:49 IST