Banks say IIFCL’s terms will leave nothing for them on the table.
It was supposed to sort out the glitches in infrastructure financing by banks. But, just about a month after it became operational, the takeout finance scheme has few takers among banks.
They say it offers no incentive for them to participate.
Take-out financing entails a bank transferring its long-term loans for infrastructure projects to term lending institutions after funding projects in the initial years. After Finance Minister Pranab Mukherjee announced the scheme in this year’s Budget, India Infrastructure Finance Co (IIFCL) rolled out the ‘Takeout finance scheme for financing viable infrastructure projects’ from April 16.
The scheme’s objective was to address the asset-liability mismatches faced by banks in financing long-term projects, some banks were close to hitting the limit of group and single-entity exposure.
Transfer too late
Bankers now say there is hardly any incentive for them to participate in the scheme, as it leaves very little on the table for them. One of the main demerits is the timing of transferring the loan from banks’ books to IIFCL. According to the scheme prepared by IIFCL, such transfer will be done three to four years after a project is operational. “In case the commercial operation date of the project gets changed with the concurrence of the lenders, the scheduled date of occurrence of takeout shall be changed accordingly,” the IIFCL’s scheme specified.
According to the scheme, a tripartite agreement between the bank, borrower and IIFCL will be signed at the time of the financial closure of a project. In case of projects where financial closure has been achieved and having residual debt tenure of at least six years, IIFCL will enter into the agreement.
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Bankers said even if a project was scheduled to start operation in two years from financial closure, most of the time it gets delayed by another couple of years. For a takeout to happen, the bank has to wait for another three-four years. In effect, if the loan tenure is for 15 years, the loan will remain in the banks’ books for half of the tenure. Which means banks will hardly benefit much if it participates in the takeout scheme.
“After seven to eight years, the cash flow of a project will become more stable, thus making the project more viable. If that is the case, it’s better for us to keep the asset in our books,” said a senior official from a public sector bank. In case the project becomes unviable, then takeout by IIFCL will not happen, as the scheme clearly rules out takeout for sub-standard assets.
“On the scheduled date of occurrence of takeout, the takeout will be executed in respect of only those loans which are classified as standard in the books of the lenders who have signed the takeout agreement,” the IIFCL scheme said.
In their defence, IIFCL officials argue any takeout internationally happens only after cash flows are stabilised. “Till the operation starts, there is no cash flow and all the interests are serviced out of the loan only. After commercial date of operations, it takes three-four years to stabilise the operations. Only after three-four years will one come to know about the real cash flow. Internationally also, takeout happens after the cash flow is more or less stabilised,” said Pradeep Kumar, chief executive officer of IIFCL.
“Secondly, banks generally have deposited 3, 5, 7 years. So, asset-liability mismatch is maximum after seven years,” Kumar said. IIFCL said it had discussed the issue in detail with the banks and Indian Banks Association (IBA) before finalising the scheme. Bankers had then suggested three-four years for takeout to occur, Kumar said.
Open to review
He said no transaction under the scheme had taken place yet, though some banks and Infrastructure Development Finance Co (IDFC) were in talks with IIFCL for a deal.
Chiefs of Indian banks recently raised their concerns regarding the issue at a meeting with the finance ministry officials. IIFCL said they were open to review the existing scheme if the situation demanded it.
Another issue bankers are not comfortable with is the takeout fee of 0.3 per cent every year, which the lender has to pay to IIFCL. The fee will be payable from the date of signing the agreement till the date of occurrence of takeout.
Since IIFCL will not accept any loans which are sub-standard, banks will end up paying a takeout fee, say bankers, though there was no surety that the agreement would go through.