Larsen & Toubro unit gains IFC status

A subsidiary of the Indian engineering business has become an Infrastructure Finance Company, enabling it to make infrastructure loans on favourable terms. Indian infrastructure company IDFC recently took the same step.

The non-banking finance arm of Indian engineering firm Larsen & Toubro has followed in the footsteps of IDFC by achieving classification as an Infrastructure Finance Company (IFC) by the Reserve Bank of India (RBI).

As a result of its new classification, L&T Infrastructure Finance Company will be able to engage in infrastructure lending at lower cost and on a more flexible basis.

To become an Infrastructure Finance Company a firm must, among other requirements, deploy at least 75 percent of its total assets as infrastructure loans.

Under the new classification – the fourth category recently created by RBI under the larger umbrella of Non-Banking Finance Companies (NBFC) – L&T is now able to more easily raise money in the international markets as well as having more flexibility on the amount of capital it can lend to third parties.

In practice, L&T can now raise up to 50 percent of its owned funds automatically in the overseas markets – through what is known as external commercial borrowings (ECB) – without having to seek government approval.

Given the phenomenal growth India has been experiencing over the last years, the domestic money market has been unable to supply demand, leading the RBI to create ECBs to help plug the gap. Since it’s more expensive to borrow money on the Indian market than on the international money markets, L&T will now have easier access to lower-cost funding.

But the new classification also exempts L&T from other restrictions that affect Indian NBFCs, such as the inability to lend more than 10 percent of its owned fund to any single borrower or the inability of lending more than 15 percent of its owned fund to any single group of borrowers.

L&T follows in the footsteps of Indian infrastructure giant IDFC, which gained IFC status towards the end of June.