Coming soon: rating system for infra projects

The new system is expected to place emphasis on various in-built credit enhancement structures.

The government plans to introduce a new credit rating system for infrastructure.

The finance ministry is reviewing the final project report on the rating system for infrastructure projects. According to sources, it will be announced in the forthcoming Union Budget.

“To begin with, the rating system is being introduced only for the operational projects. Projects post commissioning date will be eligible for such ratings,” said a person close to the development.

In the early phase of discussions, the ministry had considered including both operational and non-operational infrastructure projects in the rating system, but later decided against it, the person added.

The parameters and definitions are different and cannot be compared to the banking rating system. The current system of rating debt in a range of triple AAA to D ratings has also been tweaked in the new scale. The finance minister in his Budget speech last year had said the government would come out with a rating system for projects.

The new system is expected to give emphasis on various in-built credit enhancement structures instead of relying on a standard perception of risk, which may result in mis-priced loans due to a lower credit rating.

“The project report is with the finance ministry and an announcement on it is likely,” said a second person with direct knowledge on the development, asking not to be identified.

Officials said the Securities and Exchange Board of India’s views on the proposed rating system were being sought.

Most infrastructure projects are heavily debt-funded and they lack the desirable debt quality in the initial years of operations owing to long gestation period. The new credit rating system for infrastructure projects aims to help infrastructure projects access credit facilities at better rates.

The system is also expected to open up multiple options to developers with a focus on bringing in long-term financial investors such as pension and insurance firms.

Pension and insurance firms prefer to park their money in debt instruments with higher rating, which infrastructure-related debt instruments sometimes fail to achieve.

Rating agency ICRA Ltd is spearheading this project for the finance ministry, sources said. An email query sent to ICRA on its participation and expected timeline of the rating system on Monday remained unanswered.

The proposal to launch a separate rating system for infrastructure projects was initially met with opposition from industry. One of the major apprehensions expressed was how different will the rating scale be from the current banking rating system.

Sources added that the credit-rating scale might not be made mandatory but will be promoted among lending firms to consider while debt-funding infrastructure projects.