UBI is considering takeout financing for some of its infrastructure loans

Union Bank of India (UBI) plans to go for takeout financing for some of its loans in the infrastructure segment. The public sector bank is considering going for the takeout financing scheme offered by India Infrastructure Finance Company Limited (IIFCL).

Moneylife had earlier reported on how takeout financing (under the ECB route) is expected to benefit foreign lenders more. (See: http://www.moneylife.in/article/8/7867.html).

According to well-placed sources from the bank, the public sector undertaking is seriously considering the takeout financing model.

"The bank plans to opt for the takeout financing model. We will opt for this model to remove those infrastructure loans from our books, for those projects which have been operational for the past three years," said an official from UBI.

The official refused to share further details on what the total amount of loan under the takeout financing route would be.

In April 2010, IIFCL had been allowed to lend to infrastructure projects under the takeout financing norms.

Under the new process, a tripartite agreement is required to be signed between IIFCL, the lender (in this case UBI) and the borrower (the infrastructure development company developing the project).

This financing model could be extended to projects which have achieved financial closure and have a residual debt tenor of at least six years.

Thus, UBI would opt for this model for some of its loans which it has granted to infrastructure projects - which have been operational for around three years now.

A number of banks and banking experts believe the takeout scheme will benefit late entrants. The common line of thought is that the risk and delays involved in the initial years of the infrastructure funding will be borne by the first lender or the bank.

However, this UBI official differs and says that that takeout financing will benefit the bank too.

"As per the guidelines this model will be allowed only for those projects which have been operational for at least three years. Thus, the domestic bank would have been associated with the project for six years (assuming three years is the average construction period for any infrastructure project). It is a good time period for the domestic bank to benefit from the funding," said the official. He further added, "Most importantly, it will help reduce the bank's asset-liability mismatch."

Under the guidelines issued for IIFCL's takeout financing scheme, this kind of lending could be extended to projects involving development of road and bridges, railways, seaports, airports, inland waterways and other transportation projects. This scheme will also benefit projects involving power, urban transport, water supply, sewage, solid-waste management and other physical infrastructure in urban areas like gas pipelines, infrastructure projects in Special Economic Zones (SEZs) and international convention centers along with tourism infrastructure projects.