The Reserve Bank of India (RBI) has eased the burden of financing infrastructure projects in the country by allowing companies to replace domestic rupee loans taken from banks and financial institutions with external commercial borrowings under the approval route.

India needs investment of about $1.5 trillion in infrastructure in the next three to five years.

The RBI move is expected to benefit large players who have good ratings to raise money abroad. Banks in India were raising short-term resources but lending long term, which had the potential to create an asset-liability mismatch, putting their balance sheets at risk.

The telecom sector, which is reeling under severe cash crunch, has been left out of the scheme.

The RBI statement on Thursday said it had decided to permit take-out financing through external commercial borrowings (ECBs), under the approval route, to refinance rupee loans taken from domestic banks by eligible borrowers in sea port, airport, roads, including bridges, and power sectors for the development of new projects.

The companies developing the infrastructure project should have a tripartite agreement with domestic banks and recognised overseas lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled commercial operation date (COD), that is the scheduled date of commencement of the project, the statement said, adding that the scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

R M Malla, chairman and managing director of IDBI Bank, one of the major players in the infrastructure space, told Financial Chronicle that banks were reaching their exposure limits while lending to infrastructure companies. "This brilliant move by RBI will greatly ease exposure limits and will enable banks to sanction fresh loans to these companies.”

Banks have a single exposure limit of 25 per cent of the net worth of the bank and a group exposure limit of 40 per cent.

Domestic banks, however, will not be permitted to guarantee take-out financing and the loan should have a minimum average maturity of seven years. And the fee payable to the overseas lender until the take-out should not exceed 100 basis points per annum. Further, residual loans to be taken by the overseas lender will be considered as ECB and the loan should be designated in convertible foreign currency. The loan should have a minimum average maturity period of seven years.

"The new take-out financing scheme would definitely benefit lenders in taking care of their asset-liability mismatches and to provide comfort on exposure norms. With ECB taking out existing rupee loans, there will be space freed up within for lenders to extend fresh rupee loans to projects within the existing exposure norms," said Pradeep Kumar, chief executive officer of India Infrastructure Finance Co Ltd (IIFCL).

Sheshagiri Rao, chief financial officer of JSW group, said RBI should insist on such foreign currency loans to be hedged by the players. In road and port projects, the companies undertaking the project cannot hike their fees and tolls based on foreign currency movement and hence it becomes important for such take-out loans to be hedged.”

State Bank of India is a leading lender in the segment with total infrastructure loan syndication of about $9.68 billion at the end of the half year ended June 2010. About 60 per cent of this is in the bank’s books.

The second largest financier is IDFC with a total loan book of about Rs 25,000 crore. IIFCL has a loan book of Rs 24,376 crore, followed by IDBI Bank, whose total is about Rs 17,000 crore. ICICI Bank, Punjab National Bank and Canara Bank also have high exposure to the sector.

“Many foreign lenders will be hesitant to refinance rupee loans as there are asset-liability mismatch issues in long-term projects," said the head of a foreign bank operating in India. "However, if the residual loans (for the remaining part of the tenure) are being refinanced, the risk will shift on the books of the foreign bank and Indian banks can exit. Foreign banks are wary of long-term commitment in certain sectors after the financial crisis," he said.

According to a senior official at SBI Caps, the largest syndicator of infrastructure loans in India, the move by RBI would make lending cost-effective for infrastructure companies. "With Libor falling, if companies have a natural hedge, like Reliance Industries or Tata group companies, they source loans at least 400 basis points below domestic rates," he said.

Rural Electrification Corporation’s director of finance H D Khunteta said, “It will mainly benefit big companies like Tata Power and Reliance Power who enjoy higher credit rating in international markets. However, when companies decide to replace their debt with cheaper overseas loans, money in domestic markets would get released and can be used for other upcoming projects.”

Issac George, chief financial officer of GVK Power and Infrastructure, said, “Banks were reaching their sectoral limits, so this is a relief. Once the construction risk is over, it is prudent to replace your rupee loans with foreign currency loans. The all-in cost, including hedging the loan, can be availed at around 6.5 per cent to 7.5 per cent by the Indian companies overseas, which would make ECBs cheaper by 2 per cent.”

manjuab@mydigitalfc.com