Takeout financing: Will foreign banks gain more than their Indian counterparts?
Amritha Pillay 04 August 2010

In yet another attempt to ensure more funding  for infrastructure, the RBI last month opened up the sector to the ‘takeout financing’ scheme. However, a few industry sources believe this move will help foreign lenders more

The Reserve Bank of India (RBI) has issued banking guidelines for 'takeout financing' in the infrastructure sector. While the step has been taken to ensure easy infrastructure funding, it will depend on how much domestic banks will show interest in this scheme. According to bankers, the model will be more beneficial for foreign banks.

Last month, the RBI reviewed its External Commercial Borrowings (ECB) policy and put in place a scheme for takeout finance. Accordingly, it decided to permit takeout financing arrangement through ECB, under the approval route, for refinancing of rupee loans availed from domestic banks by eligible borrowers in the seaport & airport, roads (including bridges) and power sectors for the development of new projects.

Under the new process, the corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognised lenders for either a conditional or unconditional takeout of the loan within three years of the scheduled Commercial Operation Date (COD).

"I am not even sure whether the model will take off at all. The model proposed will not benefit domestic banks or borrowers. It will help only foreign banks in this process," said an investment banker, who did not wish to be named. A number of sources from domestic banks echoed the same view.

"It is not a bad idea in theory. However, in practice, I doubt whether many banks would want to offer this route. They are right in a way to say that the model would prove more beneficial to foreign lenders or banks," said Clyton Fernandes, senior analyst, Anand Rathi Securities.

However, this move might also help domestic lenders. "It will help them (local banks) manage their asset-liability mismatch in a better way. By selling these loans, they can also earn a certain fee," said Mr Fernandes.

On the other hand, credit growth and loan-book growth numbers are likely to be lower if banks opt for takeout financing. "Certain investors are looking at a headline growth number (maybe 20% or 25%), so such investors may be a little disappointed. Thus the growth number would be impacted, but on the other hand, it would be good because right now a number of banks have a number of instances of mismatches in assets and liabilities," said the analyst.

Therefore, going forward, are domestic banks expected to go for takeout financing aggressively? The future and success of this scheme will depend on the credit demand across sectors.

"In a way, if economic growth is strong and credit demand is more broad-based, I think that domestic banks would not be much worried. If all the demand is coming from infrastructure, I don't think banks would want to take these loans off their books. If credit growth is going to be more broad-based, they may go for takeout financing," added Mr Fernandes.

"For any new scheme or regulation, if the banks are not happy, they do approach us. However, we have not heard anything from domestic banks on takeout financing. Thus, they should have no issues with it," said an Indian Banks' Association (IBA) official, who preferred anonymity.

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