State Bank of India (SBI) has signed a memorandum of understanding with Infrastructure Development Finance Corporation (IDFC) to enter into takeout financing for infrastructure loans out of the Resurgent India Bond (RIB) proceeds.
Under the takeout financing scheme, SBI will initially advance funds to infrastructure projects, which will later be taken on to the books of IDFC.
This is so as SBI has funds with short to medium term tenures and if it funds infrastructure assets of 15 to 20 year tenures there is a likelihood of it getting caught in a maturity and interest rate mismatch.
This is specifically true of RIB proceeds, which have a maturity of five years and will be specifically used to fund infrastructure projects.
Hence after five years, IDFC with long term funds will step in to pick up the loans and pay SBI. SBI, in turn, will pay off the RIB holders.
The MoU for takeout financing will be not just for assets created out of the RIB proceeds but will also be extended to other long term loans. The takeout financing can also take place after three year of creating a loan.
SBI and IDFC are perfectly suited to enter into a takeout financing deal as they do not compete with each other.
In fact, Industrial Credit and Investment Corporation of India (ICICI) had announced an intention to do takeout financing, but it is not a candidate for SBI as the two institutions are competitors.
