Repositioned as ‘take-out’ financier to banks to ensure long-term funding
The government today positioned India Infrastructure Finance Company Ltd (IIFCL) as the focal point for lending to the core sector by providing it additional capital and announcing that it would try new models to fund projects.
Finance Minister Pranab Mukherjee said that IIFCL, a special purpose vehicle created by the UPA government in its last stint, would undertake take-out financing. However, the model had failed to produce results when Infrastructure Development Finance Company, the original core sector financier, tried it at the start of the millennium.
But this did not deter Mukherjee from announcing that IIFCL would enter into take-out financing schemes with banks. Take-out financing would be used to enable banks, which mobilise deposits for short durations, to lend to infrastructure projects, which require long-term credit. Typically, under this route, a bank ties up with another financial institution and extends medium-term credit with an understanding that the loan will be taken out of its books by the other institution. This helps prevent any asset-liability mismatch. The route is especially handy during periods of tight liquidity.
M Narendra, executive director of Bank of Baroda, said, “All bank chiefs, in their meeting with the finance minister, had requested that this step be taken. This is likely to increase the participation of smaller banks, which do not possess the resources to commit long-term funds in the infrastructure space.”
Other bankers are waiting for the technicalities of the scheme to be worked out. “I see it as a plus but we shall have to wait for the guidelines,” said Partha Mukherjee, president, credit at Axis Bank.
In his Budget speech, Mukherjee said the government’s aim was to increase investment in infrastructure to more than 9 per cent of the country’s gross domestic product by 2014.
The government has made it clear that it regards investment in infrastructure as critical for growth. One aspect of the fiscal stimulus packages announced to push the economy out of the downturn was the move to allow IIFCL to borrow Rs 30,000 crore by issuing tax-free bonds, thereby enabling it to provide additional funds to infrastructure projects.
In another move to improve credit flow to the infrastructure sector, the government has decided that IIFCL will refinance 60 per cent of commercial bank loans for public-private partnership projects in critical sectors over the next 15-18 months.
The finance minister said IIFCL and banks were now in a position to support projects involving a total investment of Rs 100,000 crore in infrastructure.
