The government plans to draw in the country's biggest insurer, Life Insurance Corporation (LIC), into infrastructure project financing to boost funding for roads, ports

LIC is likely to tie up with India Infrastructure Finance Company Ltd (IIFCL) to buy out long-tenure loan portfolios of commercial banks. The practice, called take-out financing, seeks to free up the capital of banks so that they can lend to new projects.

"The issue will be discussed in the investment committee of LIC," a senior official with the insurer said. "It has to be seen that the insurance firm has the scope under the sectoral exposure norm."

The government plans to spend over $1 trillion over the 12th Five-Year Plan (2012-17) on building new and upgrading the existing infrastructure.

The plan to rope in LIC in infrastructure funding was discussed at a meeting convened by the finance ministry recently, two people familiar with the development said. The heads of LIC and IIFCL attended the meeting, these people said.

The proposed venture will allow LIC and IIFCL to buy out 40% of a bank's loan with each taking an exposure of 20%.

IIFCL will carry out the due diligence for the venture and risk factors associated with it, as it has built an expertise in this area.

The Insurance Regulatory and Development Authority guidelines require life insurers to invest at least 15% of their controlled funds in infrastructure and social sectors.

The rules also mandate that exposure to a single company should not exceed 10% of the insurer's funds, or 10% of the paid up capital of investee.

LIC and IIFCL will also have to work out the proportion of liability they will take in case the loan turns bad or non-performing.

However, the venture may not take off if banks do not participate.

The take-out financing scheme has remained largely grounded with only 70 crore of funds disbursed so far.

IIFCL, the dedicated infrastructure financier created by the government, is sitting on a cash pile of about 8,000 crore to buy out loan portfolios of banks.

There is an inherent asset-liability mismatch in banks funding long gestation infrastructure projects, as their capital is largely sourced from deposits that have three to five years maturity.

Take-out financing allows banks to shed their loan portfolios after retaining them on their books for a few years. This frees them to fund more projects.

IIFCL has also modified its take-out finance scheme recently to make it more attractive. It now proposes to take on projects immediately after their commercial operation date, as against the earlier norm of one-year waiting period.

It has also scrapped the 0.3% take-out fee, which it used to charge the lender using the scheme.

The company has so far sanctioned 3,000 crore spread over 15 projects.