With cost overruns of around 750 core sector projects (of over R150 crore) nearing a whopping R2 lakh crore and threatening to scuttle the Narendra Modi government’s plans to build world-class infrastructure in the country, the government has asked regulators, including the RBI, Irda and National Housing Bank (NHB) to work in tandem and relax funding rules.
This is to ensure that institutions including LIC, Hudco and IREDA can take part in cost overrun financing of infra projects, official sources told FE.
Cost overruns happen typically due to genuine reasons, most of which are beyond the developers’ control. These factors include delays in land acquisition, forest clearance and equipment supply, shortages of power, fuel and labour, court cases, law and order situations, fund constraints and even maoist problems. These have led to a situation where many viable projects are languishing and the value of the assets is deteriorating.
According to the current RBI norm, lenders can participate in cost overrun financing without treating the loans as ‘restructured asset’ only for cost overruns (excluding interest during construction) upto 10% of the original project cost. This means, funding where the cost overrun is over 10% of the original project cost would be counted as ‘restructured asset’ requiring higher provisioning and stress on the lender’s capital base.
Adding to this restriction is the self-imposed restraint of institutions such as LIC, HUDCO and IREDA not to take part in ‘cost overrun funding’ (or what they call ‘additional funding’) even if they are part of a lenders’ consortium that has financed an infrastructure project, as they are worried about the risks therein.
The finance ministry, citing suggestions given by a lenders’ panel headed by IIFCL chief S B Nayar, has asked the RBI to amend the norms to state that in cases where 51% of the lenders (exposure in debt by value) agree for cost overrun funding, such decision must be compulsorily accepted by all lenders in the consortium (including by entities such as IREDA which are registered with the RBI).
The ministry has backed the panel’s recommendation that the RBI should ease the 10% norm permitting lenders to decide for themselves the quantum of cost overrun funding, but of course, only in cases of viable projects. It also wants the RBI to consider a special dispensation for lenders for taking part in cost overrun funding to the extent of their proportionate share in cases where they are restricted by exposure limits.
The ministry also wants the insurance regulator Irda and the housing finance regulator NHB to align their norms with that of the RBI (once the new RBI norms allowing cost come into effect) to ensure LIC (under Irda regulation) and Hudco (under NHB regulation) can participate in cost overrun funding.
According to the latest government data, as at October-end 2014, out of 748 central sector infra projects costing R150 crore and more, 323 are
delayed.
The total original implementation cost of these projects was R9.49 lakh crore and their anticipated completion cost is R11.37 lakh crore, reflecting overall cost overruns of R1.88 lakh crore (or around 20% of original cost), the statistics ministry said.