Banks seek comfort on infra bonds

Seek stability of the HTM regime, clarity on rating action.

Commercial banks have sought comfort on the continuity in the regime allowing them to hold their investments in bonds floated by infrastructure companies in the held-to-maturity (HTM) category.

Last week, the Reserve Bank of India’s (RBI) Annual Policy Statement had permitted banks to classify investments in bonds issued by companies engaged in infrastructure activity under the HTM category. The move will protect banks from booking losses, or recognising profits, in line with the market value of the papers.

The move is aimed at boosting bank investment in infrastructure bonds that have a residual maturity of seven years or more. In case of these bonds, RBI has also allowed banks to go past the 25 per cent cap on HTM.

Banks have sought comfort from RBI in the wake of a reversal in the regulatory treatment of IFCI bonds in 2007. The move had affected the treasury portfolio of banks and they are now apprehensive that similar fate could await investments in infrastructure bonds in the future.

When the IFCI debt restructuring exercise was undertaken in 2002-03, the central bank, as a special case, had allowed banks to hold non-statutory liquidity ratio (SLR) bonds issued by the Delhi-based financial institution in the HTM category. However, in May 2007, the central bank told banks to transfer their exposure in non-SLR bonds and debentures to the available-for-sale (AFS) category, where mark-to-market (MTM) accounting rules have to be followed. As result of the change, nine banks, including State Bank of India and Punjab National Bank, were adversely affected.

“HTM status protects us from MTM losses, but a reversal in regulatory regime would expose us to uncertainty and losses, if the value of bonds erodes. The regulator needs to provide stability, as the infrastructure segment would demand resources that would run into thousands of crores over the next 10 years,” a senior executive with a large public sector bank said.

Some banks, including State Bank of India, are believed to have expressed their concern to RBI.

Besides seeking assurance to provide stable regime for infrastructure bonds, banks also want clarity on treatment of these bonds in case of rating downgrade. Very few infrastructure companies enjoy AAA or AA rating, most have BBB or lower rating and many banks would be hesitant to take exposure to such papers even if it could be parked in HTM.

Ratings agencies could lower the rating due to changes in economic or business cycle or a decline in financial profile, though the company may be making timely interest payments.

There is another issue of the availability of recourse for banks in case the company defaults on payments for infra bonds. There is no clarity on this. Banks have clear norms to deal with defaults, including charge on assets.

A senior treasury executive at another public sector bank said at present funding for infrastructure projects was happening through long-term loans. A look at the resource profile of banks shows long-term deposits have a small share in the total deposit base. Most of deposits have short to medium-term maturity. It raises the issue of asset-liability mismatch, since tenure of resources is small while loans to infrastructure projects have long tenure.

“The basic issue remains. Banks are not the apt source of long-term funding for infrastructure projects, as there is no exit route for credit exposure,” said another senior executive with Punjab National Bank.