Take-out finance scheme for infrastructure

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
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The current policy for external commercial borrowing (ECB), does not permit refinancing of domestic rupee loans with overseas borrowings. However, to address the special funding needs of the Indian infrastructure sector, the Reserve Bank of India (RBI) has decided to permit take-out financing via an ECB. The RBI has issued a circular dated 22 July, which governs the take-out finance scheme.

Shardul Thacker,Partner,Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

Eligible borrowers in the sea port, airport, roads (including bridges) and power sectors, can now access take-out financing for refinancing rupee loans for the development of new projects. The loans should be from a domestic bank and the take-out finance will be available under the approval route, i.e. an eligible borrower would need to apply to the RBI for it through an authorized dealer.

Conditions to be met

This scheme is subject to the following conditions:

(i) Infrastructure companies using the ECB are required to execute a tripartite agreement with the domestic bank and overseas recognized lender for either a conditional or unconditional take-out of the loan within a period of three years of the scheduled commercial operation date.

(ii) The minimum average maturity period of the loan should be not less than seven years.

(iii) The fee payable to the overseas lender must not exceed 100 basis points a year.

(iv) The domestic bank that finances the infrastructure project is required to comply with the existing prudential norms relating to take-out financing.

(v) The residual loan agreed to be taken out by the overseas lender would be regarded as an ECB and all existing ECB norms are to be complied with.

(vi) Domestic banks or financial institutions will not be allowed to guarantee the ECB upon take-out of the loan.

(vii) The domestic bank will not be permitted to carry any obligation on its balance sheets after the take-out of the loan.

(viii) The reporting arrangements, as prescribed under the ECB policy, will need to be adhered to.

The current ECB ceiling of US$500 million per company in a financial year under the automatic route would also apply to ECBs that are raised according to the take-out finance scheme. Further, all other aspects of the ECB policy relating to end-use of the loan, pre-payment of the loan, maturity period and refinancing of existing ECBs would be required to be adhered to.

Analysis of the scheme

The take-out finance scheme introduced by the RBI follows its earlier policy decisions notifying the creation of infrastructure finance companies and widening the definition of the infrastructure sector for the purpose of ECBs to include: cold storage or cold room facility (including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat) power, telecommunication, railways, road (including bridges), sea ports and airports, industrial parks, urban infrastructure (water supply, sanitation and sewage projects) and mining, exploration and refining.

Take-out financing is a practice by which a bank takes initial exposure to an infrastructure project and then transfers the loan to the books of a take-out financier. This scheme is aimed at allowing domestic banks to finance long-term projects, while ensuring their liabilities would be of a shorter duration.

The scheme is a well recognized mode of providing long-term funds for infrastructure projects. It will give domestic banks the option of offloading long-term loans, thereby reducing the mismatch between their short-term deposits and long-term loans for infrastructure projects. It will also reduce their exposure limits.

With increasing public private participation in infrastructure projects, the involvement of the private sector in financing infrastructure is estimated to grow in the successive five-year plans. This has resulted in a steep increase in the private sector’s debt requirements on domestic banks.

The take-out of existing rupee loans through ECBs will free up available funds and result in fresh rupee loans becoming available for new infrastructure projects. This kind of take-out financing is also expected to ease borrowing costs for corporates engaged in developing infrastructure projects that have long gestation periods.

This scheme is expected to benefit large corporate houses that enjoy higher credit ratings in international markets. It aims to encourage banks and other commercial lending institutions to release more funds for infrastructure projects that have long gestation periods.

The take-out financing model has proved a success in Europe and the US and will encourage financial institutions that have only short-term resources to fund infrastructure projects with long gestation periods. The scheme is expected to initially provide finance for about Rs250 billion (US$5.6 billion) in the next three years.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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