Credit exposure to the Roads Sector
According to ICRA,the banking sector’s credit exposure to the roads sector in August 2016 stood at Rs. 1.8 trn, growing at a CAGR of 14% over the last five years.
Fresh loan disbursements to road developers slowed down
In contrast to posting 20%+ growth for several years till FY2014, the deployment of credit by banks in the roads sector expanded at a much slower pace of 7% in FY2015 and 6% in FY2016. This outpaced overall growth in the banking sector’s credit deployed in industries—at 6% in FY2015 and 2% in FY2016.
This however does not imply that fresh loan disbursements to the road sector also grew faster than that to the other industriesUnlike a typical term loan extended to a manufacturing entity that may have tenure of 4-5 years,loan tenures for road developers are generally for a longer period of 8-10 years (even without factoring in the flexibility available to refinance for additional periods). Because of a longer tenure, such loans naturally amortize at a slower pace.
New project awards and project completions gathered momentum lately
Upfront land acquisition, upfront clearance from the Ministry of Environment and Forests (MoEF) and larger proportion of EPC contracts awarded have been some of the key enablers lately to reinvigorate the interest of developers and contractors in roadprojects, stated ICRA.
ICRA said “This is reflected in the 43% increase in awards by NHAI during FY2016 to 4,390 kms as compared with the previous year (See Chart 19). About 77% of the awards during FY2016 were through the EPC mode, 20% through the BOT (Toll) mode, 2% through the newly-introduced Hybrid Annuity Model (HAM) mode and 1% through the SPV route.
During 4m FY2017, 15 projects totalling 764 kms were awarded (against 1,541 km during 4m FY2016). Of these, ten projects totalling 501.2 kms (66% of total awards) were awarded through the HAM Mode and the remaining five projects totalling 262.7 km (34%) were awarded through the EPC route. This enhanced activity comes against the backdrop of the big infrastructure push that the government is pursuing”.