SBI, LIC near accord on infrastructure financing

Banks and financial institutions (FIs) seem to be coming closer to a pact on infrastructure financing.

In a recent meeting held between State Bank of India (SBI) and Life Insurance Corporation (LIC), the latter has agreed to provide cheap finance to infrastructure projects during their construction period.

To start with, LIC will pick up power projects where the SBI and other public sector banks have extended finance, said banking sources.

Upon the completion of the project, banks will exit so as to avoid asset-liability mismatches in their books and the life insurance major will replace them by taking the full exposure on itself.

Sources said although this scheme "" called takeout financing "" has been discussed earlier, what hindered matters was getting finance at below market rates.

But LIC, which has offered cheaper finance, has also asked comfort in the form of a guarantee from banks which, in turn, are averse to taking long-term exposure to infrastructure projects without any viable exit route.

This guarantee will help the LIC to cut down the risk exposure on projects. Sources said this is to compensate for the cheaper finance that the LIC will be providing for the initial five-year period till the project is commissioned.

However, once the project starts, the full risk exposure and capital will be provided by the LIC "" when the banks move out.

Sources said that once an infrastructure project starts , the return on investment will be very lucrative.

Infrastructure financing has been a significant foray for both SBI and LIC as the government, in its mini-Budget, had asked both banks and financial institutions to participate in project financing in a big way for using the abundant liquidity in the financial system.

It has also proposed setting up of a Rs 50,000 crore core fund to finance infrastructure projects.

As far as LIC is concerned, with the return from market investments, especially fixed income instruments, falling, and interest rates expected to firm up, infrastructure is viewed as potent investment avenue.

As it generates higher return in line with the period of investment. In this case, as it is not taking risk exposure for the initial period of completion, the viability of the investment is also attractive. This serves well as most of the assets are long-term in nature.