Govt mulls Rs 75,000 cr refinance window

The government and Reserve Bank of India (RBI) are working on opening a massive Rs 75,000 crore refinance window to provide concessional funds for infrastructure, housing and small and medium enterprises (SMEs) by partly leveraging the country’s foreign exchange reserves.

The broad plan is to provide refinancing through India Infrastructure Finance Company Ltd (IIFCL), the government-owned special purpose vehicle set up in 2006, National Housing Bank (NHB) and Small Industrial Development Board of India (Sidbi), a senior government official said.

Funds to these institutions will be available at 7 to 9 per cent to enable banks to earn a decent spread but cap lending between 10 and 11 per cent (see table), significantly lower than current prime lending rates of 13 to 17 per cent.

The announcement of this special financial window, which is expected at the end of this month, is designed to send a powerful signal to banks to lend to sectors that are considered key to economic growth. “In my view, they need such institutionalised signalling,” a senior government official said.

India is expected to grow at 7 to 7.8 per cent this year against two consecutive years of expansion at 9 per cent.

The largest chunk of the refinancing — Rs 50,000 crore or $10 billion — is being earmarked for infrastructure by leveraging India’s forex reserves. “Allocating $10 billion for infrastructure will do more to increase our credibility than the implicit reduction of usable reserves by that amount would do to reduce our protection from external shocks,” a government official commented.

Under the plan, RBI will buy bonds worth up to $10 billion from IIFCL’s London subsidiary at a coupon of 2.5 per cent, the same rate it earns on its reserves. India’s reserves currently stand at $251.4 billion.

Since IIFCL will provide banks with refinance at 9 per cent, the 6.5 per cent spread it earns by doing so is expected to cover possible exchange losses. Critically, the government, however, will bear any exchange loss beyond this percentage.

“We should agree to this arrangement in view of exceptional circumstances,” a bureaucrat said. “It may be noted that in circumstances where there is an exchange loss on this transaction, it will be more than made up by valuation gains in rupees on any reserve use,” he added.

The Planning Commission has suggested IIFCL should provide re-finance to banks for up to 75 per cent of the cost of an infrastructure project. This is expected to be a temporary measure, for two years.