Ind-Ra believes that developers and lenders to the projects however may be hesitant for such funding by NHAI, due to the clause of first charge by NHAI on the toll/annuity receivables of these projects (structural subordination) over the senior lenders' debt service. Empirical evidence suggests that even in case of infrastructure debt funds, under the non-banking financial company mode, existing lenders were reluctant to agree to the structural subordination on the termination of payments.
Funding shortfall may not be the only reason for languishing projects, but also delays in getting the appropriate approvals and clearances from various government agencies. While this has resulted in project deferrals and cost overruns, the same has further increased the stressed loans in the banking system. Hence one-time funding may not help all stranded projects, but only those that needed financing.
Bank credit to the infrastructure sector grew at a compound annual growth rate of 39.5% in the last 14 years. Outstanding bank credit to the infrastructure sector stood at INR10.07tn in March 2015 compared with INR95bn in March 2001. According to the June 2015 Financial Stability Report of the Reserve Bank of India, infrastructure constituted 15% of total advances of the scheduled commercial banks, but had a much larger share of around 30% in total stressed advances. After steel sector, roads account for the second largest amount of bad loans for the banking sector.
Therefore, the lenders already with high exposure to these languishing projects may be unwilling to commit more resources without the help from external resources. However, they may find it difficult to accept the NHAI's offer of one time fund infusion as it comes with a structural subordination, wherein the toll/annuity receivables of the project would be ensured for NHAI through execution of the tripartite agreements between the senior lender, concessionaire and the NHAI.
However, the successful implementation of recent measures by the government for bringing stalled projects back on track may give a fillip to the road sector, as this may push up average daily road construction, which has dropped to 4.1km in FY15 from an all-time high of 7.4km in FY13 (FY14: 5.21km).
The economic down turn seen in the last three years has caused reduction in the growth of traffic and consequently lower revenue realisation for BOT road projects. Consequently the appetite for BOT public private partnership projects has come down as developers have no equity in certain cases to contribute and lenders are unwilling to provide debt funds. The NHAI thus plays a crucial role, with a budget of INR720bn to spend on the roads sector this year, which is three times the INR230bn it spent in the previous year.
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