Finmin seeks to drop Jan 31 cut-off for IIFCL refinance

Finmin seeks to drop Jan 31 cut-off for IIFCL refinance
The Financial Express, July 14, 2009, Page

Sunny Verma, Surabhi, New Delhi

While Budget 2009-10 projected that infrastructure investment of up to Rs 1 lakh crore would be made available by banks and India Infrastructure Finance Company Ltd (IIFCL), there aren’t enough takers for the Rs 10,000 crore offered last fiscal.

Since the sum is meant to finance only projects bid on or after January 31, 2009, the finance ministry has proposed that the cut-off date be removed. This would allow IIFCL to refinance infrastructure projects bid in 2008 as well.

The issue is expected to feature in IIFCL’s board meeting scheduled for Tuesday, which would also work out the contours of the ‘takeout financing’ scheme unveiled by the finance minister Pranab Mukherjee. Finance secretary Ashok Chawla, who is on the IIFCL board, will also attend the meeting. When contacted, IIFCL chairman SS Kohli confirmed the meeting, but did not elaborate.

The government's first stimulus package in December 2008 authorised IIFCL to raise Rs 10,000 crore through tax-free bonds to refinance projects bid on or after January 31 in the road and port sectors. But IIFCL has been unable to disburse most of the funds as projects take a long time to bid out. For instance, although bids have been invited for nearly 40 highway projects, they are expected to be awarded only in August.

“While new projects would be looking for funds possibly from September, there are a number of ongoing projects that need money. So, we have asked IIFCL to open the refinance facility for them as well,” a government official said.

“The (January 31) deadline was an issue, and it would be a good move if it is removed.

Existing infrastructure projects will get a boost as IIFCL's interest rates are more competitive,” said PricewaterhouseCoopers executive director Hemal Zolabia.

Under the refinance scheme, IIFCL can refinance up to 60% of loans provided by banks to infrastructure projects in the roads and port sectors at 7.85%. Banks can then charge a spread of up to 250 basis points above this. The refinance tenor is ten years with a reset after five years, though that can be extended to 15 years with government approval. The takeout financing scheme, which is also a form of refinance, will draw upon the structure of the existing scheme.

These efforts are seen as crucial to encourage lending to long-gestation infrastructure projects, for example, in the power sector where 18-20 years is seen as a viable duration for funding. The finance ministry feels at least a third of IIFCL’s total financing pool should be in the form of takeout financing.

The scheme is being formalised to ensure that banks can sell their loan portfolio to a third party after a certain period of time. This will free up banks’ capital and absolve them from long-term obligations.

Central Bank of India executive director Arun Kaul said, “In the road sector, repayment is over at least 15 years. I, as a banker, do not have funds for 15-year duration. But if I get an exit route after five years, I will be willing to finance a 15-year loan. In this case, IIFCL will provide the exit route.”

A leading private developer said, “There was a lull in the road sector, and there were no developers looking for funding for about six months. The last projects were bid out even before September 2008. Now, as recently as this month, two or three projects have been awarded, which will start approaching the financial markets in another few months. But at a time when projects have to be aggressively pushed, the government should ensure that all systems are in place to carry them forward.”

Infrastructure sector growth tumbled to 2.8% in May 2009, compared with 5% in April, even though industrial production rebounded smartly to grow 2.7% in May 2009 from 1.2% in April.