India: Reserve Bank of India and infrastructure financing
Published 11 August 2014
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0.1 This publication was archived on 5 August 2016.
This article is no longer current. Please refer to Overseas Business Risk – India.
0.2 Summary
Finance Minister Jaitley in his budget speech said that banks would be encouraged to lend to infrastructure by issuing long term bonds with minimum regulatory pre-emptions such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL) targets. On 15 July, RBI issued operational guidelines. The bonds are required to have a minimum tenure of seven years and will be exempt from CRR, SLR and PSL targets, if the proceeds are used to lend to infrastructure and affordable housing. This move is positive for UK banks and likely to encourage greater exposure to infrastructure.
0.3 Detail
The RBI has allowed banks to issue long-term bonds with a minimum maturity of seven years to raise funds for lending to long term projects in infrastructure and affordable housing. These bonds will not count towards a bank’s total liabilities, against which the CRR and SLR are applied. Currently, banks are mandated by the RBI to maintain CRR (cash reserves with the RBI) of 4% of a bank’s liabilities and SLR (investment in government securities ) of 22.5% of bank liabilities .
Funds raised through these bonds will not create extra priority sector lending requirements. Currently, domestic banks and large foreign banks (more than 20 branches) have to lend 40% of total bank credit to ‘’priority sectors.’’ Foreign banks with fewer than 20 branches have to lend 32% of bank credit to ‘’priority sectors’’. Priority sectors currently include agriculture, micro and small enterprises, education, affordable housing and export credit. Export credit to large enterprises does not qualify as “priority sector” for domestic banks and large foreign banks. These banks also have sub-sectoral lending targets which stipulate that 18% of credit should go to agriculture. The new rules will mean banks lending to infrastructure projects will not need to balance this with lending to priority sectors.
The ability to raise resources through the issuance of long term bonds is expected to help banks to mitigate the asset-liability mismatch faced by banks in extending long term loans to infrastructure projects. The issuance of long term bonds by banks is also expected to provide a fillip to the corporate bond market.
0.4 Comment
The new policy will encourage banks to lend long-term to infrastructure projects. Banks are also required to refinance part of their exposure every five years which will increase the pool of seasoned assets , post-construction risk , available for investment which may support the development of Infrastructure Debt funds and other such infrastructure financing mechanisms.
These changes will have a positive effect on lending to infrastructure projects, since such lending will reduce exposure to PSL targets.
0.5 Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.