Banks seen lending more than Govt-set cost; failed projects could mean steep losses

Ongoing disputes in public-private partnership (PPP) projects, such as the Delhi-Gurgaon Highway and the Airport Metro express line in Delhi, have raised questions on the role of banks in such projects.

Banks have lent more than the Government-evaluated cost to special purpose vehicles (SPVs) of private firms implementing such projects, say Government sources as well as industry observers.

So, if the projects are cancelled for some reason, banks risk taking a hit. This is because the liability of the Government in such cases is limited to the the project cost defined by it.

For instance, take the case of the Delhi-Gurgaon toll road project, which has now turned controversial. The lenders, led by IDFC, did not take prior permission from the National Highways Authority India (NHAI) while lending more to the road developer.

Similarly, in the Airport Metro line project, which was bagged by Reliance Infra’s SPV Delhi Airport Metro Express Pvt Ltd, the lenders, led by Axis Bank, had extended a loan of Rs 2,220 crore against a Government-approved debt of Rs 1,247 crore.

For the extra loan, permission was not obtained from the Government. Now that Reliance Infrastructure has walked out of the project, the bankers could take a hit on this account.

Debt outstanding

NHAI Chairman R. P. Singh alluded to this illegal and “reckless lending by IDFC and four other public sector banks, who without regard to the termination payment, financed a huge debt of Rs 1,600 crore in the name of refinancing.”

As of end-March 2013, the debt outstanding of the original project lenders (HUDCO and others) was Rs 131.1 crore against Rs 1,552 crore of IDFC and others.

Moreover, banks have to be cautious as they handle the escrow account into which the project revenues flow. In both these disputed projects, money was taken out from the escrow account by the promoters through inter-corporate deposits, raising questions on the scrutiny level of banks.

Agreeing that project finance norms have to be tightened, Shailesh Pathak, President-Corporate Strategy, Srei Infrastructure Finance, shared his experience from a recent workshop on infrastructure project finance in Malaysia where seven Asian countries, including India, participated.

“Almost all were from public sector financial institutions. After intense discussions, the expert conducting the programme commented that Indian project finance practises were very unusual, since loan disbursement amounts were higher than the actual expenditure incurred by project developers,” he said.

On whether banks should extend more funds than the Government-defined project cost, there are two views. According to a Road Ministry official, for PPP projects, there was a need to ensure that the total project cost (TPC) defined by the Government would equal the bank lending and equity money put in by the private developer.

But an NHAI official feels that banks can lend more than the Government’s TPC, subject to the project sponsor’s liability being limited. “The mechanism of arriving at the project cost for Government uses inputs such as wholesale inflation, while banks may be using retail inflation numbers,” the official said.

Difficult to match

“It will be difficult to match Government-defined project cost with that of the project developers. That said, variations of 10-15 per cent are understandable, but not of 100 per cent. Also, lenders should be ready to take a hit for their aggressive lending decisions and not expect the Government to cover the lender’s liability beyond Government-defined project cost,” Vishwas Udgirkar, Senior Director, Deloitte-India, said.

Recently, RBI’s Deputy Governor K. C. Chakraborty had stated that there has been an over-reliance on debt. The infrastructure companies are highly leveraged and the flow of equity into infrastructure project funding has been minimal. “In my view, the public-private partnership has, in effect, remained a ‘public only’ venture,” he said. Bank credit to the road sector was at Rs 1,31,300 crore in end-March 2013.

(This article was published on September 27, 2013)
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