Banks won’t budge on road loan riders

October 15, 2013

Timsy Jaipuria, Arun S | New Delhi |

Many banks have virtually stopped lending to road projects where the developers are unable to bring 50% equity capital upfront, do not have 100% of the required land in possession or have not obtained the requisite environmental clearances.”We have been insisting on these two requirements (100% land and 50% equity capital upfront by promoters) for quite sometime now,” a senior Punjab National Bank official told FE, wishing not to be quoted.Sources in the road sector and the National Highway Authority of India (NHAI) also confirmed that despite several meetings with NHAI and the road ministry, banks have started asking highway developers to show more equity contribution upfront before they lend to the project.

SBI, another big player in the area, has discontinued lending to road projects without 100% land in possession.

RK Dubey, chairman and managing director (CMD) of Canara Bank, said though the bank has not brought out general guidelines internally, it is getting selective when in lending to road projects. “Since we can’t choke funds to the sector, we have strengthened our due diligence process. We are giving loans only on the basis of the financial strength of the group that is developing the project. We have to safeguard the interest of our bank in all the possible ways as the non-performing assets are rising,” he said.

M Narendra, CMD of Indian Overseas Bank, said banks have started a stringent scrutiny of the concession agreement, besides looking at annuity payments, toll projections of the project during the entire concession period and whether there are any pending legal hurdles in the land acquisition process.

Arun Kaul, CMD of UCO Bank, said his bank has decided to go slow on infrastructure projects, including road projects, and rebalance its portfolio, which was earlier heavily skewed towards infrastructure and large corporates.

“From 75-76% of the total lending to infrastructure and large companies and only the remaining in retail and SME lending three years ago, we have rebalanced, and brought it down to 50% for each segment by focusing heavily on retail and SME loans using our branch network and technology,” Kaul said.

“In the last three years, we have not taken on any road project and have become highly selective when it comes to such projects due to the stress in the economy and the problems faced by companies in that sector,” he added.

The Centre for Monitoring Indian Economy in a report last month said, “66 highways and road projects worth R1 trillion (R1 lakh crore) are facing delays or have not taken off due to problems related to land acquisition.”

“Out of these, 44 projects worth R936 billion (R93,600 crore) are promoted by the NHAI. Only two of the total 66 projects have received environmental clearance,” it added.

An NHAI official said: “The lenders are following a very cautious approach towards the road sector since the players are over-leveraged. Banks are not sure whether they would be able to get back their money. They have started asking the developer to show the equity capital upfront and are questioning where that equity money is parked at present. This is the first time that lenders are doing this. It’s causing private players trouble .”

Recently, Oscar fernandes, in an interview to FE, had noted: “The basic thing is unless the concessionaire brings in his capital the project can’t take off. If the developer depends on borrowed money for the whole of the project’s requirement, then why do we need him? If that is the case, then we (NHAI) can fund the project and recover the money on our own.”

“We seek partnership with private firms in the belief that they will bring equity, that is, initial capital. What happens in some cases is that the developers borrow on the basis of toll collections, which means they take no risk. Which concessionaire would give his personal property and guarantee to the bank before borrowing?” he said.

Gross bank credit outstanding to the sector as on March 22, 2013 was R1,31,300 crore, says RBI data.





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