When the hybrid annuity model (HAM) for road projects was introduced a few years ago, it was believed that the move would save the sector delays and cost overruns, which had earlier pushed developers into a debt trap. However, some potholes seem to appeared.
HAM projects are in a strange situation where policy rate cuts are bound to have an adverse impact on their cash flows. This is because the developer of a HAM project doesn’t get the benefit of low interest rates on borrowings due to the slow transmission of policy rate cuts on bank lending rates. In contrast, the interest earned by the developer on project completion cost comes down quickly as it is directly linked to the policy rate. The mismatch in cash flow can therefore derail the ability of the developer to service debt.
“On a cumulative basis, for every 25 bps (basis points) decline in bank rate, the cumulative debt-service-coverage ratio (ability to service debt through profits) of the developer reduces by two bps,” said Icra Ltd in a note.
