The Union finance ministry has asked India Infrastructure Finance Company Ltd (IIFCL) to consider partnering general insurance companies for its takeout financing scheme.
The proposal is aimed at giving a fillip to takeout financing, which has not done well since its launch a year before. The move came a few days after the state-run agency entered into an agreement with the Life Insurance Corporation of India (LIC) and Infrastructure Development Finance Company (IDFC) to offer takeout financing for infra projects. This idea was also mooted by the ministry.
“We have asked them to also look at non-life insurance companies,” said a ministry official. He said a final decision would be taken after assessing whether non-life insurance companies had enough resources to take over the infrastructure loans of banks on their books.
Infrastructure projects need funds over 10-20 years, but banks are not able to provide such long-term funds, as the duration of their deposits are about five to 10 years. Takeout financing, an accepted international practice, is aimed at removing bottlenecks in infrastructure financing, by addressing the asset-liability mismatch. Under the scheme, IIFCL can take debt liability of up to 20 per cent of the total project cost, once the project becomes commercially viable. However, the much-hyped scheme got a lukewarm response, as banks felt the need for a higher takeout.
The agreement between IIFCL, LIC and IDFC provided for takeout up to half the total project cost, in a ratio of 20:20:10, respectively. It is expected to provide financing of about Rs 30,000 crore. This will facilitate banks in taking more exposure on new projects and bridge the infra financing gap.
The scheme was launched in October 2010, with IIFCL entering into a memorandum of understanding with Punjab National Bank, Allahabad Bank, Union Bank of India, Indian Bank and UCO Bank. So far, it has been able to disburse only Rs 90 crore of the total sanctioned amount of Rs 3,000 crore under the takeout financing scheme. It is estimated India will require up to $1 trillion investment in infrastructure in the 12th Five-Year Plan (2012-17).
The scheme was announced by finance minister Pranab Mukherjee in Budget 2009-10, to facilitate incremental lending to the infra sector. It was to come into force from April 2010, but got delayed since the Planning Commission had some concerns.
The plan panel had said IIFCL was a fully government-run institution and any defaults, breach of exposure norms or rise in bad loans could badly affect the government's reputation. It suggested IIFCL take some risk on its own and limit the government's exposure to projects under the scheme.
