New Delhi: The government, on Monday, approved changes to the so-called takeout financing scheme run by India Infrastructure Finance Co. Ltd (IIFCL) to make it more attractive for banks and project developers.
Under the modified scheme, the pricing mechanism of the takeout finance will be solely based on the credit rating of the infrastructure project and disclosed upfront.
“Now the developers, irrespective of the size, will get the same treatment based solely on the rating of the project. Also, they will know upfront the maximum interest rate that will be charged,” said S.K Goel, chairman and managing director of IIFCL.
The interest rate, linked to the benchmark lending rate of IIFCL, will be in the range of 9.90% to 11.15% depending on the credit rating. “Compared to prevailing market rates, these rates will be at a 75-200 basis points discount”.
Under the takeout financing scheme, loans 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 their funds to be loaned to new projects. India’s investment requirement for infrastructure development during the 12th Five-Year Plan starting in April is projected at $1 trillion.
The government has also relaxed rules related to the timing of the takeout. While for road projects, the takeout can happen anytime after?the?commercial operation date (COD), it has been relaxed to six months for projects in other sectors. Under existing norms, takeout financing can only be done one year after the scheduled COD of the project.
“Banks were demanding that the takeout should happen immediately after the COD for projects in all sectors,” Goel said. “But the government is of the view that while the road sector projects, due to annuity and toll collection, offer more certainty, projects in other sectors such as power take more time to stabilise. It is better to watch these projects for a while.”
Project developers can now also approach IIFCL with a takeout financing proposal, unlike earlier, where only banks could come up with an application. Another change is that banks will be incentivised by IIFCL through payment of a takeout fee of 0.3% of the takeout loan.
Banks, while welcoming the changes, said the scheme could have been made more attractive.
“Since banks fund the project through the construction stages and bear the risks, they would prefer to keep the loan in their books unless there is some incentive to transfer the asset. Payment of a takeout fee will provide some incentive but it could have been better,” said B.K. Batra, executive director, corporate banking, IDBI Bank Ltd.
The existing scheme did not find many takers due to pricing issues and the lack of funding in the initial stages of the project. But with these changes, IIFCL is hopeful that the scheme will succeed.
“We are planning to disburse Rs 5,000 crore by the end of the current financial year,” Goel said. “So far, we have sanctioned Rs 2,200 crore.” IIFCL is also planning to launch a $1 billion infrastructure debt fund by the end of the current fiscal. Life Insurance Corporation of India, IDBI Bank, Asian Development Bank and HSBC are the other proposed sponsors of the debt fund. “We will enter through the mutual fund route as it will give us more flexibility in terms of investment options and capital requirements,” Goel said.
“The government is trying to send positive signals through the changes and make it a little more attractive for the host of projects that are pending,” said Robin Roy, associate director at audit and consulting firm PricewaterhouseCoopers. “But besides better pricing and incentives, there is also need for quicker decision making.”