Take out Financing

Take out Financing

As per RBI notification (DBOD. No. BP. BC. 67 / 21.04.048/ 2002- 2003)

•      Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the outstanding in their books on a pre-determined basis. IDFC and SBI have devised different take-out financing structures to suit the requirements of various banks, addressing issues such as liquidity, asset-liability mismatches, limited availability of project appraisal skills, etc. They have also developed a Model Agreement that can be considered for use 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.

 In simple words  It is a method of providing finance for long projects (say 15 years) by sanctioning medium-term loans (five-seven years). It involves an understanding that the loan will be taken out of the books of the financing bank within a pre-fixed period and taken over by another institution, thereby preventing any possible asset-liability mismatch, as most liabilities of banks are in the form of deposits with tenures of less than five years. 

 According to the Reserve Bank of India data, in financial year ended March 2009, Only. Around 7.4 per cent deposits had a maturity period of more than five years. After taking out the loan, the institution can off-load it to another bank or keep it.Although the concept has witnessed teething troubles, a revival is expected given that RBI is expected to allow tapping of external commercial borrowings for takeout

Financing.

 

•       Institution/bank financing the infrastructure projects will have an arrangement with any financial institution for transferring to the latter out standings in respect of such financing in their books on a pre-determined basis.

•       It help the banks in asset liability management since the financing of infrastructure is long term in nature against their short-term resources

Advantages

•       Infrastructure projects will face less financing difficulties arising from the downturns.

•       Incremental lending to infrastructure will provide additional liquidity in the system.        
        Borrowing capacity of project developers will increase and will enable them to participate in mega  projects

Prerequisite for takeout financing

•       A proper yield curve is a prerequisite for takeout financing to succeed.

•       Securitisation framework for selling of the project loans would need to be clarified.

Types of Take out Financing

•  Unconditional take out finance -The unconditional take out finance involves the assumption of partial / full credit risk by the institution agreeing to take over the finance from the original lender  
• Conditional take over: -In this scenario, the taking over institution would have stipulated certain conditions to be satisfied by the borrower before it is taken over from the lending institution. There is, therefore, an element of uncertainty over the ultimate transfer of the assets to the taking over institution.
•  Income recognition and provisioning - The norms of income recognition and provisioning will have to be followed by the concerned bank/ FI in whose books the account stands as balance sheet item as on the relevant date (If risk is lower (based on DSCR) interest rate is lower .

For more detail refer
http://www.iifcl.org/Modified_Takeout_Scheme-7th_Sept_2010.pdf