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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Slow transmission of rate cuts affects returns on HAM road projects

The NHAI plans to release monthly grants proportionate to the completion of project construction, and the agency believes this will have a salutary effect on the working capital requirements of developers

The slow transmission of the Reserve Bank of India’s (RBI) prescribed bank rate cuts in project lending rates will impact debt service coverage ratios in operational hybrid annuity model (HAM) based projects, according to a note by ratings agency India Ratings and Research. “A sluggish transmission in project’s interest rate was not originally envisaged by developers during the bidding stage and therefore may also impact their equity returns. While the National Highways Authority of India (NHAI) bound concessions receive grants on a timely basis, a concession grantor with a weak credit profile, late annuity payments combined with delayed transmission could pose a risk to HAM projects," the note said.

The NHAI plans to release monthly grants proportionate to the completion of project construction, and the agency believes this will have a salutary effect on the working capital requirements of developers.

The RBI has significantly reduced the bank rate by 115 basis points (bps) in the last two months (27 March 2020-31 May 2020) amid the challenging covid-19 nationwide lockdown. The developers of under-construction projects, who have availed mobilisation and working capital advance from the NHAI, are likely to register nominal savings in interest costs during construction

Since June 2019, the RBI has cut bank rate by 200 bps from 6.25% to 4.25%. The transmission of the same, however, has been limited, with key non-banking finance companies (NBFCs) having barely reduced the long-term prime lending rate. Meanwhile, during the same period, the average one-year marginal cost of funds-based lending rate (MCLR) of public sector banks and private sector banks reduced by 84 bps and 56 bps, respectively. Conclusively, during the 12 months ended May 2020, the transmission of the bank rate cut to MCLR has been higher for public sector banks at 42% than to 25% (18%) for private banks.

A 200 bps expansion in the spread between the bank rate and the applicable MCLR on Ind-Ra rated HAM projects (assuming no MCLR cut) could lower the average debt servicing coverage ratio (DSCR) by 0.12x and equity internal rate of return (IRR) by 530 bps. “However, the impact on average DSCR (reduced by 0.09x) and equity IRR (reduced by 409 bps) will be lower in the event there is a 40% transmission. The average transmission between bank rate and an applicable MCLR was 40% between June 2019 and May 2020. The impact assessment study assumes a constant spread for the life of the asset and any reduction in the spread could minimise the impact. As the lower transmission affects the initial years by a higher degree than the later years of project operations, this analysis is also relevant during the period where there is a material delay in transmission."

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