New Delhi: India Infrastructure Finance Co. Ltd (IIFCL), the Union government-owned lender to infrastructure projects, successfully concluded negotiations with the World Bank for a $1.2 billion (nearly Rs5,850 crore today) loan last week and is expected to receive the money as early as this fiscal.
Simultaneously, the infrastructure lender has also asked credit rating firm Crisil Ltd to suggest a workable plan for the so-called takeout financing scheme mentioned by finance minister Pranab Mukherjee in his Budget speech on 6 July.
The loan has been in the works for some time and details of it were first reported in the media, including Mint, in March.
A finance ministry official, who did not want to be identified, said the bank is likely to release the loan this fiscal.
The bank spokesperson in New Delhi confirmed the conclusion of negotiations for the loan and said the bank’s board is likely to discuss it in the latter half of September.
The loan will have a duration of 28 years at an interest rate that will be linked to the London interbank offered rate (Libor), said a senior IIFCL executive who did not want to be identified. Libor is a benchmark rate.
Meanwhile, IIFCL, rapidly becoming the nodal agency for lending to infrastructure projects, has entrusted Crisil to help it launch a takeout financing scheme.
Takeout financing is a way to free up the balance sheet of a lender by transferring a loan on its balance sheet to another institution. A bank has to set aside a part of its equity capital for every loan it makes. Therefore, the extent and duration of loans a bank can make are constrained by the size of its equity capital and the repayment obligations on its deposits and loans.
In takeout financing, a bank wanting to free up its balance sheet for more lending transfers some of its existing loans to an institution such as IIFCL. Once IIFCL takes on the bank’s loan, it frees up the latter’s balance sheet for more lending.
In July, Mukherjee announced that IIFCL would do takeout financing, a move that is expected to provide a fillip to infrastructure financing by taking the pressure off balance sheets of banks lending long-term money to infrastructure projects.
According to a senior official in the finance ministry, who did not want to be identified, IIFCL will act as a “force multiplier” in infrastructure lending once it dons the role of a takeout financier.
Among the immediate challenges facing IIFCL is an unviable regulation on provisioning for takeout financing, two company executives said.
IIFCL voluntarily follows provisioning norms of the Reserve Bank of India, which had, in 2000, issued guidelines governing takeout financing, that make it mandatory for the company taking on loans to provide for the risk.
One of the executives at IIFCL, who did not want to be identified, said the guidelines might “have to be revisited”, something that can only be done after the details of the scheme are worked out.
IIFCL is not the first firm to offer such a facility. Infrastructure Development Finance Co. Ltd (IDFC) and State Bank of India started offering it as early as 1998. However, IDFC’s past experience is not necessarily an indicator of how IIFCL’s takeout financing product will fare since the financial conditions in the market were different at that time and IDFC and IIFCL have different levels of access to long-term funds, said Partha Mukhopadhyay, an infrastructure expert with the Centre for Policy Research, a Delhi think tank.
IIFCL administers a refinance window for banks—for which it had been permitted to raise Rs10,000 crore in low cost bonds. However, no bank has approached the firm for loans, the same IIFCL executive said.