Banks allowed to invest in long-term infra bonds issued by other lenders

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Mumbai | Published: April 8, 2015 12:15:52 AM

The Reserve Bank of India (RBI) on Tuesday allowed banks to invest in long-term infrastructure bonds issued by other banks...

The Reserve Bank of India (RBI) on Tuesday allowed banks to invest in long-term infrastructure bonds issued by other banks, albeit with certain conditions.

In July 2014, banks were allowed to issue long-term infrastructure bonds, which were exempt from the RBI’s cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. However, banks themselves were not allowed to hold this category of bonds issued by other banks.

The RBI has said that banks’ investments in these kind of bonds will not be treated as assets with the banking system in India for the purpose of calculation of the net demand and time liabilities.

The central bank added that any single bank’s holding of bonds in a particular issue will be subject to certain limits in relation to the bond issue size.

“Banks being permitted to invest in other banks’ long-term infrastructure bonds will now improve liquidity and lead to a better price discovery.

More banks will now consider raising funds through this category of bonds,” said Shashikant Rathi, senior vice-president and head, investments, ALM and capital markets at Axis Bank.

banking

The RBI said the aggregate holding of a bank in infrastructure bonds issued by other banks will be subject to certain limits in relation to its own assets.

RBI governor Raghuram Rajan said the idea was not to have another source of financing. “The quantum would be very limited; something to the tune of a single-digit fraction of the bank’s assets,” Rajan said.

The infrastructure bonds held for trading by banks will, however, reduce the bank’s priority sector and liquidity benefits obtained from its own issuance of such bonds, RBI said. The apex bank indicated that detailed guidelines in this regard will be issued shortly.

Till date, the largest infra bond issue was by Axis Bank when it raised R5,705 crore in December last year at a coupon rate of 8.85%.

ICICI Bank had also issued infra bonds worth R3,900 crore in September 2014 at a coupon rate of 9.25%. The bank had reportedly issued infra bonds close to R2,400 crore recently, according to bond arrangers.

Punjab National Bank, Andhra Bank and Bank of Maharashtra are some other banks that have raised funds through infrastructure bonds.

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