In response to the FMs Budget speech which, among other things, stated banks will be permitted to raise long-term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL), RBI on July 15 published guidelines for issuance of long-term bonds by banks. Banks issuing infra-bonds is not new, as this was permitted by RBI 10 years ago in 2004. But what is new this time is that there is no SLR/CRR and PSL requirement for such funds raised through infra-bonds.
As per the new guidelines, banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to long-term projects in infrastructure sub-sectors and affordable housing. The bonds would be rupee-denominated, in plain vanilla form, fully paid, redeemable, unsecured and without call or put option. It can be issued with a fixed or floating rate of interest. There will not be any restriction on the quantum of such bonds to be issued by banks; however, the regulatory incentives will be restricted to the bonds that are used to incrementally finance long-term projects in infrastructure and loans for affordable housing. However, this exemption will be subject to a ceiling of the eligible credit which will change every year. The formula given by RBI to arrive at such eligible credit (for the current financial year up to March 2015) includes all incremental credit to infra and affordable housing plus 16% of standard outstanding loans to these two sectors on the date of issue of RBI circular. The level of eligible credit will change every year depending upon the quantum of loan sanctioned to infrastructure and affordable housing sector.
Simultaneously, to boost housing sector, RBI has widened the definition of affordable housing. Under the new definition, loans of up to R50 lakh in metros for houses valuing up to R65 lakh and those of up to R40 lakh for housing valuing up to R50 lakh in all other cities are now part of affordable housing. Hitherto, housing loans given by banks to individuals up to R25 lakh in metros and R15 lakh in non-metros were considered as affordable housing loans. With the new provision of long-term bonds, it is expected that interest rate may come down on affordable housing loans. However, it may not happen immediately but over a period of time.
Considering outstanding bank credit of R11,655 billion in May 2014 (July will be the base as per RBI guidelines), which includes R8,573 billion infra plus R3,082 billion housing in terms of pre-revised definition, banks will be eligible to issue infra-bonds roughly around R1,500 billion to R2,000 billion during 2014-15 depending upon the level of standard assets and incremental credit growth from now onwards to infra and affordable housing sector.
Considering the huge infrastructure requirement of the country of over R1.3 trillion, it is a very timely and welcome move. However, the success will depend upon how banks price these bonds, and the risk appetite (fixed versus floating) of the end-users. The bond can be issued through a public issue or private placement. In issuance process, Sebi guidelines will have to be compiled and rating and listing will be mandatory. Thus, rating, handling, listing and mandatory charges will add incremental cost to such deposits. To attract individuals to invest in infra-bonds, it would be necessary for banks to offer return higher than long-term deposits. Currently, five-year and above term deposits fetch 9-9.5% interest. In case a bank decides to pay 9.5% or 10% fix interest on infra-bonds, the actual cost may be around 11% or 12% considering expenses. Here, the SLR/CRR exemption will help save some cost. It would be wise if banks sell infra-bonds across the counter through their branches to save cost. As stamp duty is not uniform across the states, it will also be necessary to resolve this issue before selling bonds through branches.
The FM in the Budget speech has talked about 5/25 structure in respect of infra financing. Hence, there is an urgent need to develop take-out financing market in India. In this context, increase in FDI cap in insurance from 26% to 49% is very positive step. As term lending institutions in India have gradually become NBFCs or banks, insurance, pension funds will now have a major role to play in developing a vibrant take-out finance market in India.
Overall, the move by RBI is very positive, and the infrastructure sector will get a new lease of life in terms of funding as it should enable banks to solve asset liability mismatch. However, it would be even more meaningful if the government considers some tax incentives for individuals for investing in infra-bonds as it would not only enable banks to raise funds at a reasonable price but will also provide depth to bond market in India which mostly runs through private placement route. Additionally, the urge to develop a take-out financing market, solving the vexed problem of stamp duty, etc, may be the next steps. Clearly, this may be just the beginning of acche din for the infrastructure sector!
(Arun Chansarkar co-authored this article)
The author is chief economic advisor, State Bank of India. Views are personal