Road project loans to get secured debt tag

December 10, 2012

Move can cut cost of funds for large projects

The prime minister has moved a proposal that will lead to classifying loans given by banks and financial institutions to road projects as secured debt.

The objective is to reduce the cost of funds for the projects and also encourage banks to take larger exposures in road projects.

To make this possible, prime minister Manmohan Singh has asked the chairman of his economic advisory council, C Rangarajan, to suggest appropriate recommendations. Roads secretary A K Upadhyay has been asked to put together a note to the council for the purpose. On its part, the finance ministry will seek feedback from RBI and banks. Rangarajan will consult RBI before making recommendations.

At a recent review by the prime minister, the ministry flagged the treatment of loans and the cost of money as the biggest limiting factors in mobilising funds for road projects.

The prime minister has asked road minister C P Joshi to ensure that contracts for construction of 8,000 km of roads are awarded by March. But the ministry has said that contracts for 3,000 km under the build operate and transfer scheme would be awarded by then.

The government has also decided to set up an independent rail tariff authority and railway minister Pawan Kumar Bansal will go to the cabinet with the relevant proposal next month. The authority may be announced in the next rail budget.

Also on the directive of the prime minister’s office, the Mumbai elevated rail corridor and locomotive factories in Madhpur (Bihar) and Marhowra (West Bengal) would get support from the railways next year.

PMO wants the Maharashtra government to sign the support agreement for the elevated rail project within a fortnight. The railway ministry has been asked to ensure that bids for the project are opened before the next rail budget.

An inter-ministerial group headed by cabinet secretary Ajit Kumar Seth has suggested that the railway ministry seek approvals from the cabinet committee on economic affairs quickly for both the locomotive factories. Both will come up in partnership with the private sector.

About the dedicated rail freight corridors PMO wants revised estimates and funding arrangements finalised by next week.

Seth will coordinate security clearance before the financial ends for large port projects which plan to expand their combined handling capacity to 245 million tonnes a year.

March is also the deadline by which two major ports projects in Andhra Pradesh and West Bengal will be awarded. The shipping ministry’s proposals for this will go before the cabinet soon.

Loans given to roads, bridges and other public properties like Delhi Metro are considered unsecured as there is no tangible security. Banks recently made a representation to finance minister P Chidambaram to let them classify loans to public property as secured advance.

Banks also said that once revenues began to come in as toll fee for sue of roads ad bridges, loans to them could be used as collateral, making it secured exposure.

Lately banks have been cutting their exposure as many road projects are stuck for want of clearances. Their main complaint is loans to projects delayed by more than two years have to be classified as substandard assets and they have to make higher provisions.

A substandard unsecured loan has a provisioning requirement of 25 per cent of total loans, while a secured loan has only 15 per cent in the first year of classification.

P Sitaram, chief financial officer of IDBI Bank, said, “For loans given to roads bridges and other public property there is no tangible security as these cannot be taken up by banks and sold off. But all these projects have toll collections that can serve as collateral. There is a view that these advances should be considered secured assets.”

Bankers say that even working capital loans given to some debtors are secured as cash receivable from the customer is secured. The same argument can be extended to exposures to public utility infrastructure.

Usually road developers enter into a concession agreement with banks, NHAI and the state concerned. Private companies develop roads on a BOT basis which allows them to run and maintain the road or bridge for 10 to15 years and then transfer it to the government.


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