Bank funding for road projects may not come all that easy in the coming days.
The Finance Ministry has come up with certain suggestions as part of its attempts to improve the risk management practices of the public sector banks (PSBs) as regards the roads sector.
PSBs have now been asked to disburse loans only after NHAI (National Highways Authority of India) or State Governments have acquired 100 per cent ‘right-of-way’ for the road projects.
The Finance Ministry has also suggested that promoters be asked to bring upfront at least 50 per cent of their contribution to the special purpose vehicles (SPVs).
These recommendations came at a recent meeting convened by the Finance Ministry with senior management of PSBs, official sources said.
Most road projects in the country are implemented through SPVs.
A right-of-way is an area of land over which people and goods have the right to pass or travel. It describes the right to pass through land owned by someone else for a specific purpose.
A number of road projects have got stalled in the wake of litigation around small parcels of land forming part of such projects, an analysis by the Finance Ministry of projects over Rs 1,000 crore showed.
This has put banks’ exposure in such projects at some risk.
Currently, NHAI awards road projects even if the right-of-way acquired is only to the extent of, say, 85 per cent.
Based on the comfort of NHAI, banks were financing the projects even without 100 per cent right-of-way, bankers said.
As regards promoters’ contribution, bankers pointed out that promoters bring their contributions in phases. If the projects get stalled, the promoters run the risk of losing lesser amount in such situations. It is invariably banks who are saddled with large exposure. There is no requirement for promoters to bring specific proportion upfront.
Already, institutions such as India Infrastructure Finance Company Ltd (IIFCL) have stipulated these conditions — 100 per cent right-of-way and higher upfront promoter contribution — for financing of road projects, it is learnt.
Now that these suggestions have come from the Finance Ministry, bankers are inclined to accept them.
“We will certainly examine the suggestion on 100 per cent right-of-way and try to implement it for all the future road projects sanctioned by us”, V. Kannan, Executive Director, OBC said.