Hyderabad, March 15, 2017

Credit rating services major ICRA is set to come out with first set of ratings for a toll road project, a transmission network and an annuity road project under the new expected loss based credit rating approach for the infrastructure sector.

The moves comes in the backdrop of the Union Budget of 2016-17 expressing the need for a new rating approach for infrastructure company and initiatives of the Ministry of Finance and new norms formulated and announced by ICRA for the infrastructure sector.

The new rating framework comments on the expected loss of a project entity and factors in the probability of default and the recovery prospects, Shubham Jain, Vice president, ICRA, told Business Line.

The new rating approach enables better risk-based pricing and can also help in opening up long term funding avenues for the sector.

Apart from being useful for fundamentally strong projects which face temporary cash flow mismatches during the extended lifecycle of the project, they would give a clearer picture of the finances, Jain explained.

Explaining the rationale of the new system, Jain said that the new rating system will focus on the overall recovery of dues by the investor or lender, a metric that can be evaluated subsequently. This makes this scale amenable to get itself evaluated for its differentiating and predictive capability.

The new rating approach factors in issues beyond the control of the company. Take the case of demonetisation and its impact on a road project. A good project could have been impacted due to issues relating to demonetisation where toll collection was suspended for about three weeks.

Jain expressed the need to develop alternate funding avenues as currently banks and NBFCs are overburdened by infrastructure credit. Among other factors, it limits their ability for fresh lending.

Jain said “Emerging avenues like Masala Bonds, InvITs, and NIIF have the potential to significantly improve the infrastructure funding landscape in India. However, these being new products would require consistent regulatory support and investor acceptance.”

The rating agency official expressed that there was need for alternate funding avenues necessary for sustainable improvement.

[The Hindu Business Line]