While the Union finance minister on Wednesday called for more foreign capital in infrastructure projects, banks are not enthused by the guidelines on takeout financing through external commercial borrowings issued by the Reserve Bank of India.
Investment bankers said the conditions attached to takeout financing through foreign loans would make the exercise a procedural nightmare.
Takeout financing refers to the practice in which a bank takes initial exposure to an infrastructure project and transfers the loan to the books of a takeout financier after a couple of years. It is meant to solve the problem that banks face in financing long-term projects, since most of their liabilities are of much shorter duration.
The government has set a target of Rs 40,00,000 crore (Rs 40,000 billion) for investment into infrastructure in the 12th five-year plan (2012-2017).
Takeout financing has been tried domestically but has failed to take off.
A few weeks earlier, RBI came out with guidelines on using takeout financing through ECBs, which would allow foreign lenders to take out loans from Indian banks.
One of the conditions is that a tripartite agreement has to be struck between the borrower, the initial lender and the takeout financier. The takeout must occur within three years of the project's commissioning.
Practical issues
"It will be tough for lenders to take a call on interest rates and covenants three years in advance," said a senior executive of a large foreign bank.
"In addition, foreign lenders might not be comfortable with an agreement which would subject them to Indian jurisdiction, while Indian borrowers and banks would not want to fight cases in foreign courts."
Infrastructure firms say the three-year limit on the takeout will not be a problem for them.
"Generally, re-financing is done after commercial operations (begin) because by then, construction risk is over and we get better rates. If we get three years to refinance, it will help the company which wants to refinance," said Isaac George, chief financial officer, GVK Power and Infrastructure.
However, bankers also said the cap on commitment fees is too stringent. The guidelines stipulate the takeout financier cannot charge a fee of more than 100 basis points for the undisbursed loan amount.
For dollar financing, the commitment fee is usually 30-50 bps of the spread over the benchmark rate, bankers said. For instance, if a company avails of a loan priced at Libor+300 bps, it pays the lender a semi-annual fee of 90-150 bps on the sanctioned amount that is yet to be drawn.
For rupee financing, the commitment fees are much less, at 25-50 bps of the loan amount. Infrastructure firms agree that the cap on commitment fees might make it tough to find takeout financiers.
"Earlier, it (the fee) was 300 bps; now they have reduced it to 100 bps. If people who are releasing ECBs are comfortable, then we will be at an advantage. Very few people may be willing to offer it at that fee," said Balarami Reddy, chief financial officer of Hyderabad-based infrastructure firm IVRCL.
"Takeout financing relaxation is good but it has come with conditions such that clear benefits have not come to real loan takers."
