The Reserve Bank of India is likely to permit Indian corporates to remit the guarantee fees in foreign currency to foreign banks abroad to ensure the success of the new credit derivative scheme. Institutional chiefs have already made presentations to the central bank in this regard and RBI governor Bimal Jalan has reportedly assured them that this would be considered.

"Essentially, we are planning to reverse the credit mechanism. So long, infrastructre projects were raising resources abroad on the strength of guarantees issued by Indian banks and instititions. Now, we would like to take care of the funding partwhile foreign banks can issue the guarantees," ICICI managing director and CEO KV Kamath said.By opting for "credit derivatives", the institutions can take huge exposure in infrastructure financing without taking them in their books as foreign banks will take the risk. Through the risk-sharing arrangement, institutions can go for infrastructure funding in a big way without flouting the RBI-stipulated prudential lending norms.

Going by the RBI norms, a financial institution's exposure to a single corporate is restricted to 25 per cent of its networth while exposure to a group is pegged at 50 per cent. However, for lending to infrastructure projects, it could go up to 60 per cent provided the additional credit is meant for infrastructure projects.

However, even that is not sufficient if the institutions are to share the burden of foreign lenders, sources said. The Industrial Development Bank of India has a networth of Rs 8,000 crore and ICICI Rs 5,000 crore. "If the loans are backed by guarantees fromforeign banks, we can go to any extent to finance infrastructure projects," Kamath said. According to him, the withdrawal of the US Exim from issuing guarantees will not create a problem for infrastructure financing as the Indian financial system is well equipped to "plug the shortfall"."There is no dearth of funds. What we need is about $2 billion to $3 billion over the next three years. In rupee terms this works out to about Rs 12,000 crore. We can certainly lend this money to the core sector over the next three years," Kamath said. At a recent meeting with the Confederation of Indian Industry , both the ICICI chief and SBI chairman MS Verma assured the industry body that funds would not be a constraint for the infrastructure sector.

INSIGHT -- Firm's forex risk is lesser

Under the credit derivative mechanism, since the risk will be borne by the foreign guarantor, the loan can be kept off the books of the rupee lender, according to ICICI. This is the attraction for financial institutions.However, foreign guarantors are likely to charge a hefty guarantee fee for underwriting the risks. But, it is also true that under this mechanism, the foreign exchange risk for the corporate will be restricted to the amount of guarantee fee to be remitted, whereas, under a foreign currency loan, both interest as well as principal repayments would be subject to forex risk.