|`Accounting, risk weighting, provisioning norms ticklish' |
Takeout financing would be required to overcome asset-liability mismatches in the case of infrastructure funding by banks
Financial institutions have approached the Reserve Bank of India for detailed accounting guidelines on `takeout financing' (where one institution takes over the loan asset of another after an interval of time from date of the disbursement of the loan) for infrastructure.
Among the accounting issues involved are treatment of the assets in the loan books of both the financiers for purposes of , `risk weighting'- a process that determines of what proportion of a bank's own capital as opposed to depositors' monies that should finance its loan assets- and provisioning for a possible loss from non-recovery of the assets.
Risk weighting dilemma
Bankers said the issue is whether the `risk weighting' and standard loan loss provisioning be made at the time of the agreement or when the asset is taken over.
Takeout financing is a contractual agreement, where the secondary financier agrees to buyout the assets at the end of a fixed term, at a predetermined price. So the question is whether the institution taking out the loan off the books of the bank, which has lent money, in the first place keeps adequate capital from day one of the disbursement of the loan by the former or takes note of it only after it enters its own books as part of the `takeout' financing arrangement. By extension, should it also provide against the contingency of default and hence set aside a standard sum out of its profits as loss provision even before the loan is taken over?
The India Infrastructure and Finance Company Ltd (IIFCL) Chairman and Managing Director, Mr S.S. Kohli said, "Accounting for such funding is still a grey area for the banking sector and this issue needs to be clarified by the RBI."
Bankers said takeout financing would be required for infrastructure funding for overcoming asset liability mismatches. This was because banks' average maturity of deposit was currently around three years. On the other hand, the average maturity of any infrastructure asset would be in excess of 10 years, posing major asset-liability risks. This therefore requires intervention of long-term financiers for extending the maturity.
A major reason for the relative lack of enthusiasm on the part of banks for resorting to takeout financing in the past, is the liquidity overhang in the system where banks were chasing assets. However with liquidity beginning to tighten, thanks to a phenomenon of disintermediation that has hit banks' long-term deposit flows the interest in takeout financing has returned. Infrastructure is expected to sustain the current pace of credit growth that is averaging about 28 per cent.
Stamp duty concern
Besides accounting issues, stamp duty is also a major problem for the banks, they said. This was also one of the major issues in asset securitisation, prompting bankers to domicile such off- balance-sheet transactions in States where stamp duties were low. The ideal situation would be a uniform stamp duty rate across the States or duty exemption on takeout financing arrangements.
Capital concerns are also driving the fascination for takeouts. This is especially so in the case of big ticket assets. The fear is that assuming such large-sized assets would bring in capital pressures on the banks unless back-to-back arrangements could be worked out with long-term financiers.
Institutions that have the capability to provide takeout financing for infrastructure lending include Power Finance Corporation, Rural Electrification Corporation, HUDCO, Infrastructure Development and Finance Company besides IIFCL.