RBI eases rules for banks’ infra bonds

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New instrument to fund affordable housing too

RBI eases rules for banks’ infra bonds
In an effort to ensure adequate credit flow to the infrastructure sector and also to affordable housing, the Reserve Bank of India (RBI) on Tuesday allowed banks to issue long-term bonds for financing such projects.

These bonds would be exempted from regulatory reserve requirements such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) and also from priority sector lending targets.

The norms were in line with the government announcement to this effect in last week’s budget.

In addition to the incremental infrastructure and housing loans offered by banks, 16 per cent of the existing infrastructure loa-ns will be eligible to be financed through long-term bonds in FY15, RBI said. This will allow banks to tap the bond market to finance their long-term needs.

“Banks can issue long-term bonds with a minim-um maturity period of se­ven years to raise resources for lending to long-term projects in the infrastructure sub-sectors and affordable housing,” RBI said.

The bonds will be in ‘plain vanilla’ form without a call or put option, and can be issued with a fixed or floating rate of interest. The bonds can be sold through public issuance or private placement.

However, cross-holding of infra bonds among banks is not permitted. These lon­g-term bonds will not be eligible for deposit insurance.

Banks must share data on long-term bonds soon after their issuance. They must also fix infra loan am­ortisation schedule at the appraisal stage, which sho­uld not exceed 80 per cent of the project life. RBI said banks can issue only rupee-denominated infra bonds.

KR Kamath, chairman and managing director of Punjab National Bank, said, “Till now banks were dependant on short-term deposits of one- to three-year maturity for funding infrastructure loans and they were restricting loan periods to 15-18 years even though the life of these assets was much higher.

This had resulted in an asset-liability mismatch, which would now get corrected. Also, there being no reserve requirements on such bonds, the overall cost for banks would fall.”

RBI’s standard reserve norms require banks to keep a portion of their deposits — called the CRR — with the central bank, and another portion in government securities, known as SLR. Under the existing rules, banks must keep a portion of bonds sold with RBI as reserves. The infra bonds will be exempt from these.

Vibha Batra, senior vice-president of Icra, said around Rs 2.7 lakh crore to Rs 3.5 lakh crore worth of existing infrastructure and housing loans would be eligible for financing through long-term bonds in FY15. However, the quantum of investor appetite for long-term funds as well as for floating rate bonds would eventually determine the actual size of issuances.

“In case there are limited takers for floating-rate bonds, banks may push fixed-rate home loans,” Batra said.

As for the 5/25 scheme, “For borrowers with superior credit profiles, banks may be open to take refinancing risk and the 5/25 scheme may lead to better fund availability. However for borrowers with weaker credit profiles, banks may be reluctant to be exposed to higher refinancing risk. Therefore, the flow of funds may not materially change,” Batra said.

Finance minister Arun Jaitley in the budget speech last week said, “Long-term financing for infrastructure has been a major constraint in encouraging larger private sector participation. On the asset side, banks will be encouraged to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure. On the liability side, banks will be permitted to raise long-term funds for lending to the infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending (PSL).”

RBI said lending to affordable housing qualified as priority sector lending, and put housing loans to individuals up to Rs 50 lakh for purchase/construction of houses valued up to Rs 65 lakh in the six metropolitan centres viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad, and up to Rs 40 lakh for houses of valued up to Rs 50 lakh in other centres in this category. The central bank will periodically review the definition of affordable housing to account for inflation.

Navin M Raheja, chairman and managing director of Raheja Developers, said: “Giving infrastructure status to affordable housing will boast the housing sector. This will help developers mobilise cheaper finance for development of affordable housing projects and will result in a drop in housing prices in the long run.” Raheja also expects home loan rates to come down because of this move.

RBI said the economy needs large funding for infrastructure. “There are substantial risks associated with infrastructure at the construction phase, which requires flexible bank financing. Post construction, however, suitably-structured long-term loans can be taken-out by long-term lenders, such as, infrastructure funds, pension funds and insurance companies. Banks need the flexibility to structure loans to mitigate risks as well as to ensure easy refinancing,” it said.

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