With the takeout financing scheme not taking off as envisaged, the Union finance ministry will take up the issue with bankers tomorrow during the annual review meeting.
India Infrastructure Finance Co Ltd (IIFCL), which launched the takeout financing scheme amid much fanfare, has seen only a few projects taking off. According to data compiled by the finance ministry, as on end March, IIFCL has sanctioned 33 proposals for takeout involving Rs 4,871 crore. Of these 33 proposals, Rs 635 crore has been disbursed in seven projects.
The ministry has noted that banks are reluctant to part with standard assets and as a result, the developer and IIFCL face difficulty in executing the Takeout Agreement. More, some banks insist on charging prepayment fees in addition to the incentive of 30 per cent of savings to the developer paid by IIFCL to banks. This adds cost for the developer and reduces his available saving.
The scheme was developed keeping in view the asset-liability mismatch of banks while lending to infrastructure projects. Typically, the liabilities of banks are of three years, while loans for infrastructure development are given for eight to 10 years or even more. The Reserve Bank of India had also raised concern on the widening asset-liability gap of banks due to lending for such projects.
The scheme aims to take out the loan from banks after the construction risk is over. However, banks argue that since they have supported the project in the initial construction phase where the risk is perceived to be highest, they’d like to reap benefits during the operation phase, when the majority of risk is over. This is mainly because banks usually do not adequately factor in the project risk at the time of lending and generally price the project risk over the complete life of the instrument, said an executive with a medium-size public sector bank.
According to the ministry, banks expect to charge the same risk premium over the complete life of the project, which means the bank charges a lower risk premium during the construction phase and a higher risk premium after commissioning, and this practice is required to be rationalised.
At tomorrow’s meeting, the ministry is also expected discuss the effects of slowdown in the economy and a rise in non-performing assets (NPAs). A senior public sector bank executive said the new accretion to NPAs had been much more than the reduction in existing NPAs, due to lower levels of upgradation and recoveries. Also, despite write-offs, gross NPAs have continued to rise significantly. Banks have also restructured a large number of accounts under the corporate debt restructuring mechanism and some of the cases may not lead to the desired turnaround.
Going forward, banks might face some further deterioration in asset quality if credit growth slows.
Finance Minister Pranab Mukherjee and D K Mittal, secretary, department of financial services, will also review the status of rollout of financial inclusion plans, business correspondents and performance on lending to agriculture and to small and medium enterprises, beside educational loans.
