In a bid to boost infrastructure lending, the Reserve Bank of India (RBI) is likely to allow banks to issue infrastructure bonds. These bonds will not attract the mandatory cash reserve ratio (CRR) and statutory liquidity ratio (SLR) provisions.
Given that banks remain the main lenders to the infrastructure space, the central bank believes it is necessary to make it easier for them to fund such loans as infrastructure is a priority area. The regulator may also allow banks the flexibility to classify the loans as standard assets even if the repayment is not completed within 10 years. The idea appears to be to structure the loan over a 25-year period.
These bonds are expected to be subscribed by both retail and institutional investors. Pension funds and insurance funds are likely to be buyers of these bonds; although the funds will be invested in the infrastructure sector, they would not be taking on a direct investment risk to the infrastructure sector.
Typically, a bank needs to lend 40% of the total advances to the priority sector. However, the entire money raised from the bonds are likely to be earmarked for infrastructure loans. According to RBI data, bank lending to the infrastructure sector in April 2014 was up 11.1% from the same period last year and stood at Rs 8,44,200 crore. This was lower than the growth of 21.1% seen in the same period last year.
Indian banks, which have been reeling under huge non-performing assets, blame the stagnancy in the infrastructure sector for their bad loan pile-up. Banks that had lent to the sector during the infrastructure boom are now in trouble as stalled projects are leading to borrowers not repaying the loans.