Bidding appetite from infrastructure developers in the medium term could dampen as RBI has proposed a sharp increase in lenders’ provisioning for standard assets from 0.4 per cent to 5 per cent for all fresh and existing project loans under construction, thereby directly impacting their cost of debt, cautioned CareEdge Ratings.

Referring to RBI’s draft guidelines on ‘Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation,’ the agency said if these guidelines are implemented, they are expected to present funding challenges for both under-construction and operational infrastructure projects.

HAM road projects

A mandatory tail period accounting for 15 per cent of a project’s economic life will restrict the ability of infrastructure projects to secure additional top-up loans, per a report put together by Rajashree Murkute, Senior Director; Maulesh Desai, Director; and Prasanna Krishnan, Associate Director, CareEdge Ratings.

“The agency estimates that this will necessitate an 8-10 per cent increase in equity requirements for hybrid annuity model (HAM) based road projects to align the loan tenure with 85 per cent of the economic life for concessions lasting 15 years,” said Murkute.

She observed that projects with stable cash flows, such as road annuities, transmission and commercial real estate, typically see an improvement in credit profile within one year of establishing a payment track record from the counterparty.

Therefore, the mandate to reduce debt by 20 per cent to lower provisioning could delay the realisation of interest rate benefits for such operational projects, despite an enhanced credit profile.

”Nonetheless a compulsory 20 per cent debt reduction to achieve lower provisioning is considered a positive step for demand-based projects, as it mitigates the risks associated with bulky back-ended repayments and subsequent refinancing,” Murkute said

Interest rates

She emphasised that defining a specific credit event and implementing a resolution plan in a time-bound manner will necessitate increased monitoring and timely reviews from all stakeholders.

“Infrastructure projects, being capital intensive, are highly sensitive to changes in interest rates. Consequently, a significant rise in the provisioning requirement from 0.4 per cent to 5 per cent during the construction phase is likely to diminish the bidding appetite of developers in the medium term,” Murkute said.

For instance, in availability-based projects such as annuities, each 100-basis points (bps) increase in interest rate is likely to result in a 5-7 bps reduction in the average debt service coverage ratio (DSCR) profile. In the case of demand-based projects, such as toll roads, each 100-bps increase may lead to a decline of 7-10 bps in the average DSCR.