The RBI on Tuesday issued a number of guidelines and incentives in the form of flexibility in loan structuring, and allowing banks to raise funds for lending to infrastructure sector without regulatory requirements, such as CRR, SLR and priority sector lending targets.

This will incentivise banks to lend to the infrastructure sector. In the past, banks have been reluctant to fund very long-term infrastructure projects, given the inability to raise funds for such long tenures.

The new guidelines will not only help banks reduce their asset-liability mismatches, but also minimise the need for restructuring such loans. Infrastructure is among the top five sectors that contribute significantly to the level of stressed advances.

On the asset side

The RBI has now allowed banks to lend to very long-term projects, with an option to refinance it periodically. This would help in two ways. One, banks would be able to lend to such projects easily without worrying about asset-liability mismatches.

Two, ensure long-term viability of projects by drawing up a more realistic loan repayment schedule. Banks can now have a repayment schedule for 25 years, and opt for refinancing it after a particular period, say five years. This is will ease the cash flow pressure on developers, as the loan repayment is spread over a longer period. Banks are now allowed to draw up a schedule for 80 per cent of the initial concession period (during which the developer is allowed to collect revenues on the project).

For instance, on a 25-year period road project, if the developer is allowed to collect toll revenues for 25 years, then the bank has a repayment schedule for 22 years. “Earlier, banks were constrained to draw up an amortisation schedule for a period of 12-15 years. This resulted in higher stress on cash flows of developers.

Now they can have a more realistic schedule, creating enough cushion for contingencies,” says KR Kamath, Chairman and Managing Director, Punjab National Bank.

This also reduces the need for restructuring, as banks will be allowed to refinance at specified periods.

“Thus, there will be a new set of lenders at different stages of the projects based on the risk appetite. If a financier wants to take on lesser risk and enter when the project is completed, he may not mind settling for a lower return on funding of such projects,” says Kamath.

Banks will be able to raise funds specifically for lending to the infrastructure and affordable housing sectors without regulatory requirements such as CRR, SLR and priority sector lending. Banks can issue long-term bonds of a minimum of seven-year tenure.

At present, banks need to hold 22.5 per cent of their deposits in G-Secs as SLR. Similarly, banks need to set aside 4 per cent of their deposits with the RBI as CRR, which does not fetch any interest.

By freeing up funds for lending to infrastructure, banks will be able to generate higher returns. The cost savings will depend on the amount of incremental bonds issued. Going by current numbers, nearly ₹1 lakh crore of liquidity could get freed up in the banking system. However, the RBI has capped the amount that can be claimed for such regulatory leeway. In the current year, only 16 per cent of the existing infrastructure loans and affordable housing loans on banks’ books will be eligible for claiming such exemptions.

This will gradually increase, and the entire bonds raised will become eligible for regulatory incentives in 2020.

“The more such incremental bonds are issued, the more will be the benefit that will accrue to banks. But the risk appetite for such bonds will also play an important role. As projects kick-start in the infrastructure space and there is more acceptance of such bonds by the markets, the benefit will be more. The cost of such funding will gradually come down,” says Soumya Kanti Ghosh, Chief Economic Adviser, SBI.

For the current year, the cost savings could work out to 10-15 basis points, which can go up to 40-60 basis points in 2020.