Infra players turn to EPC contracts as banks shut project funding tap

Infrastructure players are increasingly chasing EPC (Engineering, Procurement and Construction) projects as they do not require equity investments. This is a fallout of banks’ reluctance to finance infra companies after the RBI recently tightened the framework for non-performing loans.

The RBI’s February 12 circular scrapped the existing debt restructuring mechanism and mandated lenders to implement resolution plan for loan servicing default of even one day.

A player from the power sector said that banks are reluctant to refinance loans or even provide guarantees, making it impossible for coal-based generators without long-term Power Purchase Agreements (PPAs) to participate in the new scheme for short-term procurement of electricity announced by the government.

Sufficient liquidity

“What will happen now is all these accounts will be asked to maintain sufficient liquidity buffer so that even in the case of some delay, there is liquidity in the system to take care of the immediate debt servicing requirement,” Shubham Jain, Vice-President and Sector Head, corporate ratings, ICRA, told BusinessLine .

While maintaining extra liquidity may seem one challenge, project funding, which has already been an issue the past few years, will now become out of reach for many private players.

“For the last five years I have not bid for any projects that require equity... whatever I bid for is EPC,” one of the top infrastructure developers, who did not want to be named, told BusinessLine . He suggests that with the new RBI norms in place and with the general reluctance of banks to lend to the infrastructure sector, developers will turn EPC contractors, while all the capex will be done by the government.

“No private player will put any more money in the infrastructure sector, all will be done on EPC basis, while the government will have to fund the projects as it has high targets to achieve,” he added.

According to him, the NHAI has realised that equity is an issue and that banks are not willing to lend to BOT (build-operate-transfer) or hybrid annuity model (HAM) projects. Hence, the mindset change in favour of the EPC model. the NHAI, at the same time, can raise funds through various asset monetising mechanisms and it has been doing so quite successfully in the recent past.

According to Rohan Suryavanshi, Head, Strategy and Planning, Dilip Buildcon, access to bank funding is not closed for the sector entirely and depends on a company’s strength.

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