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May 18, 2024

Public Sector Banks Label Reliance Infrastructure’s SPV as NPA

In a significant development, several large public-sector banks (PSBs) have classified loans extended to HK Toll Road, a special purpose vehicle (SPV) of Anil Ambani-led Reliance Infrastructure (RInfra), as non-performing assets (NPA) during the January-March quarter. This classification reflects the growing financial challenges faced by RInfra in managing its infrastructure projects.

The financial strain on HK Toll Road became evident when Acuite Ratings downgraded its long-term rating on a Rs 502.39 crore loan from B to D in January this year. Additionally, a Rs 15.61 crore loan was downgraded from B to C. According to Acuite, the downgrade was due to defaults on the principal repayment of the term loans, although there were no delays in interest payments. Acuite attributed the defaults to the company’s stretched liquidity position, underscoring the financial difficulties faced by the SPV.

Incorporated in 2010 by Reliance Infrastructure, HK Toll Road was tasked with the strengthening and widening of a 59.87-kilometer stretch of National Highway-7, from Hosur to Krishnagiri in Tamil Nadu. This project, part of the Golden Quadrilateral that connects Bengaluru and Chennai, aimed to expand the highway from four lanes to six. The project was designed to be executed in a design-build-finance-operate-transfer (DBFOT) mode under the National Highways Development Project, managed by the National Highways Authority of India.

The recent classification of HK Toll Road’s loans as NPAs highlights the challenges facing lenders and borrowers in the infrastructure sector. The project, critical to improving connectivity and economic growth in the region, has encountered financial hurdles that have now escalated to a significant banking issue.

The impact of these defaults extends beyond Reliance Infrastructure. Some lenders have reported increased fresh slippages in the January-March quarter as HK Toll Road’s account transitioned to the substandard category. According to banking regulations, loans categorized as substandard require banks to increase provisioning to 15-20%, which adds a financial burden on the banks.

Adding to the sector’s challenges, the Reserve Bank of India (RBI) recently proposed raising the standard asset provision requirements for project loans during the construction phase from 0.40% to 5%. Bankers have expressed concerns that such a sharp increase in provisioning could undermine the viability of ongoing projects, as it would necessitate the repricing of existing loans.

Over the past decade, bad loans have surged primarily due to infrastructure loans. The gross non-performing asset ratio peaked at 11.8% in March 2018. However, there has been a steady decline in bad loans, reaching an 11-year low of 3.2% in September 2023. Despite this improvement, the situation with HK Toll Road serves as a reminder of the persistent risks in the infrastructure sector.

Reliance Infrastructure has not responded to inquiries regarding the current status and future plans for HK Toll Road. The project’s financial instability poses questions about the feasibility and future of similar infrastructure ventures under RInfra’s management.

In summary, the classification of HK Toll Road’s loans as NPAs by major PSBs underscores the ongoing financial difficulties within India’s infrastructure sector. It highlights the need for prudent financial management and regulatory measures to mitigate risks and ensure the successful completion of critical infrastructure projects. As banks and borrowers navigate these challenges, the focus remains on balancing financial stability with the imperative of infrastructure development

Jhumpa Lahiri

Jhumpa Lahiri

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