In order to meet financial requirements of infrastructure projects, banks may extend credit facility in the form of working capital finance, term loan, project loan, subscription to bonds and debentures/preference shares /equity shares acquired as a part of the project finance package which is treated as deemed advance and any other form of funded or non-funded facility.
Take out financing: A mechanism designed to enable banks to avoid asset liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects is known as ‘take-out financing’ Banks may enter into a take out financing arrangements with IDFC/other financial institutions, or avail of liquidity support from IDFC/other FIs. Under this type of financing structure, banks that finance the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring the outstanding in their books to the latter on a pre determined basis.
In this connection, it is to be noted that IDFC and SBI have devised different take out financing structure to suit the requirements of various banks, addressing issues such as liquidity, asset liability mismatches, limited availability of project appraisals skills, etc. They have also developed a Model Agreement that can be considered for user as a document for specific projects in conjunction with other project loan documents. The agreement between SBI and IDFC could provide a reference point for other banks to enter into somewhat similar arrangements with IDFC or other financial institutions.
An alternative to the take out financing structure is the ‘liquidity support’ from IDFC. IDFC and SBI have devised a product that provides liquidity support to banks. Accordingly, IDFC commits to refinance the entire outstanding loan (principal + un-recovered interest) or part of the loan, to the bank after an agreed period. The credit risk of the project will be borne by the concerned bank. The bank would repay the amount to IDFC with interest according to the terms agreed upon. Since IDFC would be taking a credit risk on the bank, the interest rate to be charged by it on the amount refinanced would depend on the IDFC’s risk perception of the bank. In most of the cases, it may be close to IDFC’s LR. The refinance support from IDFC would particularly benefit the banks, which have the requisite appraisals skills and the initial liquidity to fund the project.
Separation of credit risk and funding is not allowed. Accordingly, banks are prohibited from issuing guarantees favoring other banks/lending institutions for the loans extended by the latter. This is because the primary lender is expected to assume the credit risk and is not supposed to pass on the same by securing itself with a guarantee. However, RBI permits banks to issue guarantees favoring other lending institutions for infrastructure projects, provided the bank issuing the guarantee takes a funded share in the project to the extent of at least 5 percent of the project cost, and undertakes normal credit appraisal, monitoring and follow up of the project. This has been done by RBI in view of the special features of lending to infrastructure projects, viz., high degree of appraisal skills required on the part of lenders and availability of resources of a maturity matching the project period.
Financing Promoter’s Equity:
Normally banks are advised not to grant advances towards taking up shares of other companies. This is to ensure that promoter’s contributing towards the equity capital of a company comes from their own resources. However, as witnessed in the recent past and in view of the importance attached to the infrastructure sector, RBI, under certain exceptional circumstances, allows the financing of the acquisition of promoter’s shares in an existing company, which is engaged implementing or operating an infrastructure project in India.