RBI norms for takeout finance by FIs

MUMBAI, JAN. 24. The Reserve Bank of India has prescribed certain prudential norms for the lending and `taking-over' financial institutions (FIs) in the case of takeout finance. This was necessary to meet the financing requirements of infrastructure projects as FIs and banks have been increasingly taking recourse to the new product of take out finance, the RBI said in a statement here today.

The apex bank, in a recent circular to FIs, said it had examined the issue pertaining to the criteria for assigning risk weights and applying other norms in respect of takeout finance by FIs and banks. FIs have been advised to assign risk weights and apply income recognition and provision norms in the case of take out finance, the circular said.

Under a takeout finance arrangement, the FI or bank financing an infrastructure project (lending institution) transfers the outstanding of such financing to the books of another FI (take- over institution) on a pre-determined basis.

Takeout finance helps the banks in asset-liabilities management since they finance infrastructure which required long term funds out of their resources which are short term.

According to the circular, in the case of an unconditional takeover for the lending institution, the risk weight would be 20 per cent where the full credit is assumed by the taking over institution whereas it would be 20 per cent on the amount to be taken over and 100 per cent on the amount not to be taken over where only partial credit risk is assumed by the taking over institution. In the case of taking over institution, the credit conversion factor would be 100 per cent while the risk weight would be the same on the amount to be taken over.

For conditional take-over, the risk weight would be 100 per cent for a lending institution but the credit conversion factor would not be applicable since it would not to be off the balance sheet item. For taking over institution it would be 100 per cent and 50 per cent respectively.

For income recognition and provisioning where the credit facility becomes a non-performing asset (NPA) before taking over, the lending institution should classify it as NPA, income not to be recognised on accrual basis, provision to be made appropriate to the asset classification and as and when the asset is taken over by the taking over institution and the corresponding provision should be reversed.

For the taking over institution, no obligations would arise till the asset is actually taken over and on taking over such assets should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books on that date.

- PTI

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