Government may relax takeout financing rules

The move could help the state-owned IIFCL in providing longer-term funding to large infrastructure projects 

 

Under the takeout financing scheme introduced in 2010, a portion of the loan given by banks to infrastructure projects are taken out of their books by IIFCL. This helps banks in avoiding an asset-liability mismatch and frees up funds to finance new projects. Photo: Priyanka Parashar/Mint 

 

            New Delhi: The government is considering relaxing rules governing taking loans given to large infrastructure projects off the books of the financing bank, which could help the state-owned India Infrastructure Finance Co. Ltd (IIFCL) provide longer-term funding to such projects.

A committee comprising finance ministry officials is looking at making the takeout financing (the technical term for this process) work better, said S. K. Goel, chairman and managing director of IIFCL. “We have asked the government to allow us to continue funding the project even after the lead bank exits,” he said. “The committee is considering this.”

Under the takeout financing scheme introduced in 2010, a portion of the loan given by banks to infrastructure projects are taken out of their books by IIFCL. This helps banks in avoiding an asset-liability mismatch and also frees up funds to finance new projects.

After the initial version of the takeout financing scheme failed to take-off, the government revised the scheme in December 2011.

It was decided that the pricing mechanism of the takeout finance will be solely based on the credit rating of the infrastructure project and disclosed upfront. The government also relaxed the criterion on the timing of the takeout.

However, it maintained that IIFCL could only issue loans for the same tenure as the other banks since it can neither be a lead bank or a sole bank in funding a project. 

Most banks give loans to companies upto a maximum tenure of 10 years. As a result, although IIFCL has the ability to lend for a longer tenure, it is unable to do so and has to exit with the lead bank.

“If we are allowed to stay on for a longer period, it will be a relief to the project developer as they can now access funds at a lower cost and for a longer tenure,” Goel said.

“This will help project developers access longer-term funds at economical terms,” said Samir Kanabar, tax partner at audit and consultancy firm Ernst and Young.

Disbursements under IIFCL’s takeout financing scheme jumped to Rs.2,126 crore in the year ended 31 March compared with Rs.564 crore in the previous year.

Infrastructure remains a significant bottleneck in one of the world’s fastest growing major economies. According to the Planning Commission, India needs to spend $1 trillion in the years to March 2017 to get its infrastructure up to speed.

The government has allowed the UK arm of IIFCL to lend upto 50% of its funds to private sector projects, up from 20% in a financial year. This will especially benefit power sector projects that import capital goods and avail foreign currency financing.

 

TOUHID HUSSAIN

PGDM   2nd SEM