>New takeout financing norms - Positive for banks, NBFCs and infra companies

ECBs) after the project risks stabilize. We believe this is positive for non-bank finance companies (NBFCs) and banks as it will help them manage ALM risks better and can also earn fees on selldowns. Some investors are worried about domestic credit growth being impacted with this. We do not subscribe to that view because there is a significant requirement for bank funds to finance infra projects and with economic growth, working capital requirements will also be cyclically strong, in our view. We believe rather that it will help banks manage their ALMs better.

The Reserve Bank of India (RBI) yesterday evening released new ECB takeout financing norms. The norms allow infra companies to convert their domestic debt to ECBs only after project risks stabilize (but within three years). Such refinancing will require approval from RBI and is not automatic. Until now, infra companies were not allowed to refinance their domestic debt with foreign debt during the course of the loan. We believe this is positive for NBFCs and to banks who finance infra projects, as it will help them manage ALM risks better and can also earn fees on sell downs. Some investors are worried about domestic credit growth being impacted with such refinancing. We do not subscribe to that view because there is a significant requirement for bank funds to finance infra projects and with economic growth working capital requirements will also be cyclically strong. We believe rather that it will help banks manage their asset liabilities better because the key risk for banks in financing infra was that they did not have enough long-term funds (more than 3 yr funds) to support these projects. For NBFCs, the key advantage would be that they can improve leverage.

Key highlights:
i. The corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

ii. The loan should have a minimum average maturity period of seven years.

iii. The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to take-out financing.

iv. The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum.

v. On take-out, the residual loan agreed to be taken-out by the overseas lender would be considered an ECB and the loan should be designated in a convertible foreign currency and all extant norms relating to ECB should be complied with.

vi. Domestic banks / financial institutions will not be permitted to guarantee the take-out finance.

vii. The domestic bank will not be allowed to carry any obligation on its balance sheet after the occurrence of the take-out event.

viii. Reporting arrangement as prescribed under the ECB policy should be adhered to.

ix. The refinancing option will be available to sea port and airport, roads including bridges and power sectors for the development of new projects. Eligible borrowers may, accordingly, apply to the Reserve Bank for necessary approval before entering into a take-out finance arrangement.

To read the full report: FINANCING NORMS