MoF okays takeout financing cap

Written by Sunny Verma | New Delhi | Updated: Mar 31 2010, 14:07pm hrs
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To catalyse long-term lending for infrastructure projects, the government has finalised the broad contours of the proposed takeout financing scheme, to be offered by India Infrastructure Finance Company Ltd (IIFCL).

The finance ministry has agreed to a Planning Commission suggestion to put in place a running cap of Rs 25,000 crore on the total worth of projects IIFCL can finance under this scheme. This means at any point of time IIFCLs total exposure to this scheme cannot exceed Rs 25,000 crore. The scheme has been in the works for the past one year, but had been held up due to persisting differences among the departments.

Takeout financing means using a long-term loan as a substitute for a short-term loan for any project. Since banks can offer only short-term loans because of the nature of their business, IIFCL will buy out those loans with longer tenures. This will help provide long-term loans for the infrastructure sector.

When contacted by FE, IIFCL chairman and managing director SS Kohli said, We have the draft (on takeout financing) ready. We are awaiting the final approval of the government.

While deliberating on the draft scheme prepared by IIFCL, the Planning Commission has suggested that only fresh projects should qualify for funding under this mechanism.

The central idea of a state-owned entity like IIFCL taking out loans from banks books is that it should enable end-borrowers to raise long-term funds at reasonable costs.

The Plan panel is of the view that in the case of existing projects, wherein developers or infrastructure companies have already contracted loans, the banks may not pass on the benefits to their customers in terms of lower interest cost. However, banks as well as IIFCL are of the opinion that the scheme should fund existing projects, too. The members on the board of IIFCL include finance secretary Ashok Chawla and secretary of the Planning Commission Sudha Pillai.

The government has estimated the infrastructure sector will need $1-trillion funding within 2017-18. A senior finance ministry official said the proposed takeout scheme will help in closing this gap. This gap is mainly on the debt side and not on the equity side, he said.

Finance minister Pranab Mukherjee has said in the Union Budget 2010-11 that he wants to gradually refashion IIFCL as a force multiplier for the infrastructure sector.

In a recent presentation to the Planning Commission, Chawla has pointed out that the proportion of stable deposits or deposits of over five-year duration of Indian banks is only about 20% of their total outstanding deposits. Therefore, the leeway for bank investment in infrastructure projects, which are of much longer duration, is limited.

The takeout financing scheme will help banks overcome this key constraint of asset-liability mismatch while giving long-term infrastructure loans. It will enable banks to take the loan out of their balance sheet after a gap, thereby, freeing up capital for further lending. The core problem is that the banking system does not have the muscle to lend long, said DK Joshi, principal economist at rating agency Crisil.

Given the current environment, India could potentially see a shortfall of $150-190 billion in infrastructure investment due to the shallow bond market and finite long-term lending ability of Indian banks, SBI chairman OP Bhatt has said at the same Planning Commission meeting.