The Reserve Bank of India?s annual credit policy review for the year 2010-11, announced on Tuesday, seems to have given a boost to long-term financing in the infrastructure sector, one of the key drivers of the nation?s growth. The central bank has now allowed banks to classify their investments in non-SLR bonds issued by infrastructure companies under the held to maturity (HTM) category having a minimum residual maturity of seven years. The move will go a long way in helping infra projects in which the gestation period is longer. The appetite for infrastructure finance would be higher due to this, according to VD Mhaiskar, chairman and managing director, IRB Infrastructure Developers.
OP Bhatt, chairman, State Bank of India, said, ?As much as 70-80% infrastructure finance is done by commercial banks. Going forward, they will continue to do that.?
Jayesh Mehta, MD & country treasurer, Bank of America, said, ?This is a positive step. Instead of going through the SPV route for infrastructure loan, the HTM category for non-SLR corporate bonds can make governance easier for loans.?
So far, banks? investments in non-SLR bonds are classified either under held for trading (HFT) or available for sale (AFS) category and subjected to ?mark to market? requirements. Hemant Kanoria, managing director of Kolkata-based SREI Infrastructure Finance, pointed out, ?It (tangible security) can be put in as collateral security and the cost of borrowing is expected to come down. However, the overall RBI policy move in the infrastructure sector will facilitate infra financing.?
In a bid to meet the increasing financing needs of infrastructure development, RBI has taken some more measures to facilitate the adequate flow of bank credit to this sector. According to the RBI policy statement, infrastructure loan accounts classified as sub-standard will attract a provisioning of 15%, instead of the current prescription of 20%.
?To avail of this benefit of lower provisioning, banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on such cash flows,? RBI said in the policy statement.
However, some feel that higher provisioning will still be maintained higher in infrastructure lending. ?It is always better to be prudent in higher provisioning in infra financing,? said the head of an infrastructure company.
Roopa Kudva, managing director & chief executive officer, Crisil, said ?India?s financial stability emerged relatively unscathed in the global financial crisis. We expect India to grow at around 8% GDP in the next 3 years. Globally, it is among the highest. Bank credit may grow at 20-22% in the current fiscal year driven by
infrastructure spending and revival in capital spending.?
Moreover, rights, licences and authorisations of borrowers, charged to banks as collateral in respect of project loans (including infrastructure projects) are not eligible for being reckoned as tangible security for the purpose of classifying an advance as secured loan, according to the policy statement.
As toll collection rights and annuities in the case of road/highway projects confer certain material benefits to lenders, it is proposed to treat annuities under the build-operate transfer (BOT) model in respect of road/highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks? right to receive annuities and toll collection rights is legally enforceable and irrevocable.
There is a general consensus in the industry about the need to develop a mature debt market to make long-term money available in the infrastructure sector. ?The debt market has to grow for economic growth. It is less than one tenth of the equity market,? Deven Sharma, president of S&P and chairman of Crisil, recently said. Banks were concerned about their growing exposure to the infrastructure sector. Although they welcomed the measures initiated by the central bank to promote infrastructure financing by banks, they indicated that there is a need to develop alternative sources for financing to supplement the efforts of the banking sector.