India Infrastructure Finance Company Ltd (IIFCL) has devised a product that will enable infrastructure

RELATED ARTICLES North East customs stations hit by poor infrastructure Siemens eyeing growth in infrastructure Mukherjee pitches for foreign investment in infrastructure

companies to issue IIFCL-guaranteed bonds. This is expected to attract investments from long-term investors such as insurance companies and pension funds.

SK Goel, in his first interview after taking over as chairman and managing director of IIFCL, told Financial Chronicle that the company had also sought the government's approval to take out bank loans to infrastructure projects after a year of their commercial operation date, instead of three years now.

IIFCL has sought the government’s approval to take out the entire loan of a bank given to a project. At the moment, a takeout of 75 per cent of such loans is allowed.

“We are seeking a change that will allow us to step in to take out the entire 100 per cent. This is because a bank will generally not be willing to shed just part of the asset to us but will like the give up the entire 100 per cent,” Goel said.

Takeout financing involves a new lender stepping in to take over the existing loan of another lender with the twin purpose of freeing up the first lender’s resources for fresh lending and to help it match its assets and liabilities. The takeout financing scheme for viable infrastructure projects, for which IIFCL is the implementing agency, came into force on April 16 this year.

“We are coming out with a product called credit enhancement. Under this, we will extend out guarantee to bonds issued by infrastructure companies to improve their ratings. On the back of our guarantee, the bonds will become more attractive for investment by, say, insurance companies and pension funds which have long-term funds,” Goel said.

He said that the product should hit the market within two months. “We are ready with the product and are awaiting government approval.”

Goel said that long-term money was the felt need of the infrastructure sector. “Banks can only provide short-term funds. Long-term funds can come by creating instruments that long-term investors will find comfortable,” he said.

The credit enhancement product will help in raising funds to meet the massive and ever increasing demand from the infrastructure sector. “The problem now is on the supply side. We have to arrange adequate funding to meet this demand. It is the top priority of the government, as there is a huge outlay of around Rs 42,00,000 crore in the 12th five-year plan. The new credit enhancement facility is being devised to help cater to this need,” Goel said.

IIFCL is expecting a demand of at least Rs 4,00,000 crore to Rs 5,00,000 crore on it over the next five years.

Bankers, pension fund managers and project developers welcomed IIFCL’s twin moves. MD Mallya, chairman and managing director of Bank of Baroda, said a reduction of the period for takeout financing to become operational would be benefit lenders. “That was one of the measures that banks were discussing with IIFCL to make the scheme more attractive. The move will surely help the banking sector,” Mallya said.

MV Nair, chairman and managing director of Union Bank of India, also felt that a quicker takeout of the entire loan amounts would help banks. He said after a takeout, loans became long-duration loans taking into account the construction period of an infrastructure project.

A senior NTPC official said that takeout trigger of a reduced period of one year would help companies. “The move would help in extension of the repayment schedule. Companies will also be able to replace costlier debt with cheaper ones early, saving on costs,” he said.

Balram Bhagat, chief executive officer of UTI Retirement Solutions, said his company would surely look at investing in long-term bonds if they were guaranteed. “We will definitely be interested in investing in bonds that are guaranteed,” Bhagat, whose company manages a pension fund corpus of nearly Rs 2,073 crore, said.

Elaborating the change sought in the takeout financing scheme, Goel said the shortening of the duration for IIFCL to step in was needed since many important infrastructure projects were yet to reach the commercial operation stage.

“Take out financing is linked with the commercial operation date. In the present scheme, takeout financing can take place only after three years of that date. The request to reduce the period to one year is important since in many large infrastructure projects the commercial operations have not yet taken place. We are hopeful that the amendments will come up shortly. It will have to be cleared by both the finance minister and the prime minister,” Goel said.

IIFCL, which was set up by the government in early 2006 to fund infrastructure lending special purpose vehicles with loans of over 10 years, had cumulative sanctions of Rs 24,376 crore at the end of 2009-10 while disbursals touched Rs 1,18,37 crore.

(With inputs from Sarita C Singh, New Delhi)

sarbajeetsen@mydigitalfc.com