The central bank on Monday issued risk weightage, income recognition and provisioning norms for takeout financing to be followed by both the lending and the taking over institutions. It has stipulated that in cases where the counterparty risk is guaranteed by the Government, the risk weight will be zero.

The risk weight applicable to a lending institution varies from 20 per cent of the amount to be taken over (in case of an unconditional takeover), to a 100 per cent risk weight for a conditional takeover. On the other hand, the risk weight for the taking over institution has been pegged at a constant 100 per cent.

However, while there is no credit conversion factor applicable to a lending institution since the entire takeout financing is not an off balance sheet transaction, the credit conversion factor applicable to a taking over institution varies from 50 per cent incase of conditional takeover to 100 per cent for an unconditional takeover. The RBI issued the takeout financing guidelines to financial institutions (FIs) earlier this month.

Under a takeout finance arrangement, the FI/bank financing an infrastructure project (lending institution) transfers the outstanding loan amount to another institution (taking over institution) on a pre-determined basis.

Takeout finance helps the banks in assets-liabilities management since they fiance infrastructure which requires long-term funds while their resources are short term. The takeout finance arrangement involves three parties: promoters of the project, the lending bank or institution and the taking over institution. The company recognises the takeout finance arrangement by way of an inter-creditor agreement. The RBI has stated the taking over institution will have to make provisions on NPAs being taken over in their accounts from the date of it turning into a NPA in the lending institution's books.