It is a big change in the approach to financing the infrastructure sector, whose funding demand is pegged at $1 trillion in the current five-year plan ending 2017. Finance Minister Arun Jaitley said banks can raise long term funds for infra projects with minimum regulatory pre-emption.
Put simply, these funds will not attract norms like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and those on priority sector lending. While the finer details are awaited, banks will have more to lend for funding long-term infra projects.
At present, for every Rs 100 crore raised through deposits, banks have to keep Rs 4 crore with Reserve Bank India as CRR (which earns zero interest income) and invest Rs 22.5 crore in government bonds to meet SLR norms. Beside, Rs 40 crore has to be lent to priority sectors.
Long-term financing for infrastructure has been a major constraint in encouraging larger private sector participation, said Jaitley.
State Bank of India chairman Arundhati Bhattacharya said this permission for banks was a positive step. M Tanksale, chief executive of Indian Banks’ Association, said it was a good start to clear constraints.
On assets, Jaitley said banks will be encouraged to extend long-term loans to the infra sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure (allowing banks to give a 25-year loan for a project but the loan would get transferred to another entity’s balance sheet after five years).
Allowing infra loans to be given for longer periods matching the life of the asset is a big positive. It will prevent undue stress in repayment of infrastructure loans and will also reduce user charges, the SBI chief said.
Infra finance company IDFC Ltd, set to become a bank in October 2015, will benefit from the more liberal regime. It will be able to raise funds at lower costs and improve business prospects, analysts said. The company had earlier stated its intent of curbing infra loans to meet statutory requirements in the run-up to becoming a bank. The IDFC stock closed 8.9 per cent higher at Rs 151 on the BSE exchange.
Housing Development Finance Corporation chairman Deepak Parekh (also head of IDFC’s advisory council) said it was innovative thinking, helping banks to look at funding infrastructure with renewed interest.
Besides lowering the cost of funds, there are other benefits. Karthik Srinivasan, senior vice-president at ICRA, said the access to long-term funds for banks at minimal regulations would help them partly reduce the asset-liability mismatch and the liquidity coverage ratios under Basel-III rules.
Ananda Bhoumik, senior director, India Ratings, said banks could even choose to pass on the SLR/CRR exemption to the borrower. Now that the asset-liability mismatches had been corrected, we were likely to see sizable issuances from banks, he said.
Infra exposure of the banking system rose to 15 per cent of non-food credit as of end-March from five per cent in March 2002, according to an India Ratings report. This led to an increased asset-liability mismatch, with banks raising relatively short-term money. This had put pressure on the money market, where banks are the largest borrowers, perennially present in less than one-year maturities, the report added.
BENEFITS EXPECTED BY LENDERS
- Can lend more funds at lower cost
- Reduction in asset-liability mismatch
- Improved liquidity profile
- Lowered stress in repayments
- Flexibility in structuring long-term loans