The RBI has permitted the refinancing of domestic loans in certain specified infrastructure sectors by external commercial borrowings under certain specified conditions.

The Reserve Bank of India (“RBI”) on Wednesday 22 July, 2010 issued a circular^[1] permitting refinancing under a Take-out Finance Scheme (“Scheme”).  Under the existing External Commercial Borrowings (“ECB”) policy, borrowers were not allowed to refinance their existing domestic loans with foreign currency loans. The RBI has now permitted this under certain specified conditions. Takeout financing will now be permitted as an ECB under the approval route for refinancing rupee loans availed from domestic banks in connection with projects in a limited number of infrastructure sectors.

Takeout Financing has been seen as necessary prerequisite for the development of infrastructure in India. This is because domestic banks are cautious of lending to projects with a 10-12 year gestation period considering that their longest term deposits are around 5 years. Overseas borrowers are slightly cautious with projects that involve land acquisition and other government approvals. If domestic lenders provide support in the initial years of an infrastructure project, the logic goes that foreign lenders would have a greater level of comfort in such loans. Furthermore, this is also a method by which joint venture (JV) projects could possibly take financial support from their foreign partner. 

The Budget 2009-2010 originally envisaged takeout financing as a domestic measure to meet the long term financing requirements of infrastructure projects. The budget announcement proposed a takeout financing as a scheme to be formulated by India Infrastructure Finance Company Limited (“IIFCL”) to encourage banks and other commercial lending institutions to advance more loans towards infrastructure projects having long gestation periods. Under this scheme, banks would be allowed to sell their loan portfolio to IIFCL after a certain period of time thereby freeing up capital and absolving them from their long term obligation involving three parties, the project company, taking over institution and IIFCL.

The RBI has now permitted takeout financing by overseas lenders by amending the ECB policy to allow takeouts under the approval route. The conditions set by the RBI include:

·         The Scheme is applicable to Indian Corporates in the sea port and airport, roads including bridges and power sectors (eligible borrowers);

·         A requirement that there should be a tripartite agreement between the borrowers and the overseas lenders;

·         The takeover of the loan can be conditional, which means that the foreign lender can commit to refinance only if the project achieves certain milestones; 

·         The takeout has to take place within three years of the scheduled commercial operation date;

·         The loan should have a minimum average maturity period of seven years;

·         The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to takeout financing and will not be allowed to carry any obligation on its balance sheet after the completion of the takeout event;

·         The takeout fee payable to the overseas lender shall not exceed 100bps per annum;

·         Domestic banks or financial institutions are not permitted to guarantee the takeout finance;

·         The loan being taken out would be designated in a convertible foreign currency and must comply with ECB norms including other eligibility and reporting requirements;

Interestingly certain infrastructure sectors are excluded from the Scheme - telecommunication, railways, industrial parks, urban infrastructure, mining, refining and exploration. Also the minimum three year period stipulated under this scheme corresponds with the three year period offered by IIFCL under the domestic takeout scheme. Provided below is a summary table providing a comparison of key terms in different refinance schemes.