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  1. RBI rules stall projects with cost overruns

RBI rules stall projects with cost overruns

The project monitoring group (PMG) may have cleared projects involving an investment of close to R7 lakh crore, but many of these...

By: | Mumbai | Updated: December 29, 2014 6:30 AM
PMG may have cleared projects involving an investment of close to Rs 7 lakh crore, but many of these may not take off because RBI rules make it difficult for banks to lend to these projects. (PTI)

PMG may have cleared projects involving an investment of close to Rs 7 lakh crore, but many of these may not take off because RBI rules make it difficult for banks to lend to these projects. (PTI)

The project monitoring group (PMG) may have cleared projects involving an investment of close to R7 lakh crore, but many of these may not take off because the Reserve Bank of India (RBI) rules make it difficult for banks to lend to these projects.

A senior executive with a leading public sector bank pointed out that with the cost, in several instances, having overshot the initial estimate by more than 10%, lenders would need to classify the account as a restructured asset if they chose to fund the additional amount.

“Even if the cost overrun is say 17-18% and a relatively small amount in absolute terms, the account must be classified as restructured and would call for an upfront 5% provision,” the executive explained.

“Each project should be individually assessed to gauge if it is viable at the new cost and some forbearance could be considered,” the executive said.

graph-RBI

Bankers have been requesting the RBI for flexibility with regard to the classification of infrastructure projects.

Although the central bank has eased some norms — allowing the 5/25 norm for existing projects that have been commissioned — the issue could be discussed at the Gyan Sangam — a two-day workshop to be held later this week in Pune where Prime Minister Narendra Modi, along with finance minister Arun Jaitley and RBI governor Raghuram Rajan, will interact with bankers.

The RBI provides a dispensation by which the COD (commercial operations date) can be moved by two years if there are delays, provided the cost overrun is not more than 10%, outside of the interest during construction.

However, V Srinivasan, ED, Corporate Banking, Axis Bank, observed that quite a few projects have seen an overrun of more than 10%, particularly in the infrastructure sector.

A recent Crisil report noted that land and environment issues have caused not just time overruns but also a significant 45% cost escalation, or an average of R200 crore, for road projects.

Moreover, Srinivasan pointed out that in some instances, the promoters were finding it difficult to come up with the additional equity required.

Typically, projects have a debt : equity ratio of 70:30 — the promoter needs to bring in 30% of the additional cost for the project.

Bankers also point out that since an export performance bank guarantee, issued by Indian banks, cannot be discounted by another local bank, promoters need to look elsewhere for any additional funding. “The EPBG has to be discounted by a foreign bank,” a senior banker explained so the promoter needs to look overseas for a loan.

The tardy progress of infrastructure ventures has left demand for project finance subdued over the past year and a half, bankers point out.

According to an RBI data, sanctions dropped 32% last year to R1.3 lakh crore — levels last seen in 2005-06 — and just 30% of the peak sanctions of R4.6 lakh crore in 2009-10; fresh sanctions have fallen year-on-year in each of the last four years.

MS Raghavan, chairman and managing director, IDBI Bank, pointed out that it could be a while before demand for credit rose, given there was a fair bit of excess capacity in the system. “Moreover, there is typically a lag of around eight to nine months between the time all clearances are in place and the credit deployments takes place,” Raghavan said.

He added that promoters were starting to have conversations with lenders on projects and the sentiment was slightly better than it had been at the same time last year.

However, most promoters of infrastructure projects remain highly leveraged and have been unable to raise equity even though the stock market has been buoyant.

Analysts point out that India’s private -sector leverage is high but not all of them are able to sell enough assets to pare debt.

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