First Ever Takeout Finance Scheme Signed between IIFCL and Union Bank of India

First Ever Takeout Finance Scheme Signed between IIFCL and Union Bank of India; Finance Minister Calls for Additional Funding for Infrastructure Projects in the Country

Union Finance Minister, Shri Pranab Mukherjee has said that development of adequate and quality infrastructure is a major priority for Government to achieve sustainable and inclusive economic growth and make India a globally competitive economy. Shri Mukherjee said that during the 11th Five Year Plan (2007-12), estimated investment requirements of the infrastructure sector in India is US $ 514 billion dollars. He further added that during the 12th Plan period, infrastructure investment of US $ one trillion dollar has been envisaged. Shri Mukherjee was speaking after signing of an agreement between Union Bank of India (UBI) and India Infrastructure Finance Company Ltd. (IIFCL) in respect of some identified projects as part of the first ever major initiative under takeout finance scheme. The signing of the agreement took place in the august presence of Hon’ble Finance Minister, Shri Pranab Mukherjee, underscoring the importance of this development in infrastructure financing. 

Shri Mukherjee said that availability of long term resources to meet infrastructure investment requirement is a key challenge. He added that as per preliminary estimates, there may be a substantial gap of 30% in financing the 12th Plan (2012-17) of about USD 300 billion in debt. Government of India recognized that the debt of longer maturity was usually not available because of the various constraints such as absence of benchmark rates for raising long term debt from the market; asset-liability mismatch of the tenor of debt in case of most financial institutions; and high cost of long term debt. 

He congratulated the CMDs of the IIFCL, Union Bank of India, Punjab National Bank, Indian Bank, Allahabad Bank and Uco Bank for signing the MoU for takeout finance with IIFCL, indicating their strong interest among the banks for the scheme. He said that he is confident that the scheme would pick up momentum and will provide additional funding for infrastructure projects in the country. 

Earlier, IIFCL today issued the sanction letters for the first takeout finance transaction to UBI involving taking out of over Rs.1500 crore in 7 different projects from power and road sector. 

During his budget speech of 2009-10, the Hon’ble Finance Minister had announced that IIFCL after consultation with various stakeholders would evolve a takeout finance scheme aimed at addressing the asset-liability mismatch faced by banks while lending to infrastructure sector. IIFCL, after detailed consultation with stakeholders including commercial banks, appraising institutions, regulators, project developers etc finalised the takeout financing scheme in April 2010. Public sector banks have shown keen interest in the scheme as it will help them to increase their lending to infrastructure sector and also help in freeing up capital for financing new projects. In the recent past, banks have been aggressively expanding their loans to infrastructure projects. 

IIFCL has been engaging with various banks for speedy implementation of the scheme and based on the feedback received has incorporated various features to make the takeout financing scheme attractive. As per the scheme, IIFCL will take out the infrastructure loan from the books of the original lender upto 100% of the outstanding amount subject to the condition that the total takeout amount does not exceed 50% of the total residual loan of the infrastructure project. The takeout would occur after 1 year of achievement of Commercial Operation Date (CoD). Post-takeout, depending upon the risk profile of the project, IIFCL may consider reduction in rate of interest. 

With the implementation of takeout finance scheme through IIFCL, the long awaited need for overcoming the difficulties faced by commercial banks in asset liability management due to long tenure of infrastructure loans will be mitigated to a great extent. This will also facilitate better incremental lending to infrastructural projects by commercial banks, which is essential for the economic growth of the country. 

Shri Pranab Mukherjee, Finance Minister said that the takeout finance agreement between IIFCL and Union Bank of India is a step towards accelerating the flow of funds to the infrastructure sector. He added that the investment needs of the infrastructure sector is quite huge and considering the fact that banks need to step their incremental lending, the availability of takeout finance from IIFCL would help address the constraints relating to asset liability mismatch faced by banks. He expressed confidence that the commercial banks would take full advantage of the takeout finance offered by IIFCL. 

Shri S K Goel, CMD, IIFCL, while handing over the sanction letters to Union Bank of India stated that IIFCL has been pursuing with various banks for posing eligible proposal for takeout finance and banks have shown keen interest in the scheme. He further stated that IIFCL has undertaken its own due diligence of the proposals before considering them for takeout and expressed the hope that more such proposals will follow. He noted that the scheme is an important step taken by the company to help banks to expand their lending to infrastructure projects as going forward banks would have less headroom due to the exposure norms. 

On the occasion, the CMDs of Punjab National Bank, Indian Bank, Allahabad Bank and UCO Bank also signed MoU for takeout finance with IIFCL indicating a strong interest amongst banks for the scheme. 

Following is the text of the speech of Hon’ble Finance Minister on the Occasion of Launch of IIFCL’s Takeout Finance Scheme: 

“I am glad to be present on the occasion of launching of IIFCL’s Takeout Finance Scheme. I had announced in my Budget speech of 2009-10 that IIFCL in consultation with banks will evolve a takeout financing scheme to facilitate incremental lending to the infrastructure sector. As a follow up, IIFCL with the approval of the Government has rolled out takeout financing scheme in April 2010. 

Takeout Financing is an accepted international practice for raising long-term funds for financing infrastructure projects. It can be used to effectively address the asset-liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects. 

As you all know, Indian economy is on the path of robust growth led by increased investment and capital inflows, stronger industrial output, and rising aggregate demand. Development of adequate and quality infrastructure is a major priority for Government to help enable India to achieve sustainable and inclusive economic growth and make India a globally competitive economy. During the 11th Five Year Plan (2007-2012) estimated investment requirements of the infrastructure sector is USD 514 billion. During the 12th Plan period (2012-17), Infrastructure investment of USD 1 trillion has been envisaged. 

Availability of long term resources to meet infrastructure investment requirement is a key challenge. As per preliminary estimates, there may be a substantial gap of 30% in financing the 12th Plan (2012-17) of about USD 300 billion in debt. Government of India recognized that the debt of longer maturity was usually not available because of the various constraints such as absence of benchmark rates for raising long term debt from the market; asset-liability mismatch of the tenor of debt in case of most financial institutions; and high cost of long term debt. 

Recognising the need, the Government set up the India Infrastructure Finance Co Ltd (IIFCL) in April 2006, as a wholly-owned Government company to provide debt of longer maturity in infrastructure sectors. IIFCL’s mandate is to supplement the available debt resources; provide long term financial assistance to commercially viable infrastructure projects; give overriding priority to Public Private Partnership projects. 

Since its inception in April 2006, IIFCL has emerged as a key player in infrastructure financing space and it has made gross sanction of Rs 27,778 crore in 156 projects involving a project cost of Rs 2,33,399 crore. These projects are spread across 23 states in the country. Financial closure has been achieved in 137 projects (88% of Total sanctioned no. of projects). The company has disbursed Rs 11,159 crore to 111 projects. Commercial Operation Date (CoD) has been achieved in 18 road projects and 2 port projects. 

The takeout Finance scheme of IIFCL will benefit the developers by elongation of repayment period and reduction of interest rate based on the improved risk profile at the time of Scheduled takeout. The company has sanctioned takeout finance in the 7 projects involving takeout amount of over Rs 1500 crores. I congratulate CMD, IIFCL and CMD Union Bank of India for signing first ever takeout finance agreement. I also congratulate CMD’s of The CMDs of Punjab National Bank, Indian Bank, Allahabad Bank and UCO Bank for signing the MoU for takeout finance with IIFCL, indicating their strong interest amongst banks for the scheme. 

I am confident that the Scheme would pick up momentum and it will provide additional funding for infrastructure projects in the country.”