Variable Bonds for HAM Projects

Under the Hybrid Annuity Model (HAM) concession agreement,?NHAI? has agreed to pay interest on developers? capital at bank rate plus 3 per cent. Developers? capital includes equity and debt amount infused in a project by the developer. Under the HAM concession agreement, typically, 40 per cent of the project cost is financed by NHAI and 60 per cent is financed by the developer. This was evolved in view of financial crunch faced by developer and bank?s reluctance to fund entire project cost. Banks have taken the brunt of non- performing assets (NPAs) due to default by concessionaire due to non-completion of projects for ROW issues and other contractual issues. Hence, banks have represented NHAI to partly fund the project cost to reduce their risk.

Forward-looking concept In earlier PPP model of annuity/toll roads, the developer used to fund the entire project cost. In case of annuity model, NHAI used to pay fixed half yearly installment over the period of concession. Such projects ran into trouble in view of change in bank rate. Hence, NHAI came up with a new concept of variable interest rate linked to bank rate.

This concept of variable interest rate was a forward-looking concept where NHAI payment was linked to the bank rate. It was on presumption that interest rates are decided by banks in a transparent and fair manner. In case the bank rate is?reduced by RBI?, then banks will reduce the interest rate and in case the bank rate is increased by RBI, then banks will increase the interest rate. However, due to increased NPA and higher fixed deposit interest payout, the bank?s lending cost has increased substantially. Hence, banks have not reduced their interest rate on lending to borrowers in same quantum of bank rate reduction by RBI. The table below gives the movement of RBI repo rates and SBI MCLR and HDFC MCLR rates:

Updated on

RBI repo rate ( per cent)

SBI MCLR (1 year) ( per cent)

HDFC MCLR (1 year) ( per cent)

May 22, 2020

4.00

7.00

7.65

March 28, 2020

4.40

7.40

8.15

October 4, 2019

5.15

8.05

8.35

August 7, 2019

5.40

8.10

8.60

June 6, 2019

5.75

8.30

8.70

April 4, 2019

6.00

8.35

8.70

February 7, 2019

6.25

8.55

8.75

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