The Reserve Bank of India, in order to encourage infrastructure development and affordable housing, on Tuesday, exempted long-term bonds from the mandatory regulatory norms such as the Cash Reserve Ratio (CRR), the Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL) if the money raised is used for funding of such projects.
“Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to (i) long-term projects in infrastructure sub-sectors, and (ii) affordable housing,” the RBI said.
The RBI said that apart from what is technically defined as infrastructure, affordable housing is another segment of the economy which requires long-term funding.
The central bank said it intends to “ease the way for banks to raise long term resources to finance their long term loans to infrastructure as well as affordable housing.’’
The instructions are in pursuance of Finance Minister Arun Jaitley’s budget speech in which he had said “banks will be encouraged to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure.’’
5/25 structure Under the 5/25 structure, bank may fix longer amortisation period for loans to projects in infrastructure and core industries sectors, say 25 years, with periodic refinancing, say every five years.
The RBI issued instructions to banks specifying operational guidelines and incentives in the form of flexibility in loan structuring and refinancing.
It granted exemptions from regulatory pre-emptions, such as, the CRR, the SLR and Priority Sector Lending (PSL).
As per RBI regulations, banks are required to keep a portion of deposits as CRR with the central bank and park certain portion in government securities known as SLR.
Mitigating ALM problems “The objective of these instructions is to mitigate the Asset-Liability Management (ALM) problems faced by banks in extending project loans to infrastructure and core industries sectors, and also to ease the raising of long term resources for project loans to infrastructure and affordable housing sectors” it said.
Banks have been seeking permission for longer tenor amortisation of the loan, say 25 years, with periodic refinancing of balance debt, the RBI said.
It further said rupee denominated bonds should be issued in ‘plain vanilla form’ without call or put option with a fixed or floating rate of interest.
Lending for affordable housing means loans eligible under the priority sector, and loans up to Rs.50 lakh to individuals for houses costing up to Rs.65 lakh located in the six metropolitan centres. For other areas, it covers loans of Rs.40 lakh for houses with values up to Rs.50 lakh.
Long gestation period The RBI said that while banks have been raising resources in a significant way, issuance of long-term bonds for funding loans to infrastructure sector has not picked up at all. Infrastructure and core industries projects are characterised by long gestation periods and large capital investments.
The long maturities of such project loans consist of the initial construction period and the economic life of the asset/underlying concession period (usually 25-30 years).
India is looking at investing $1 trillion in infrastructure development by 2017, half of which is expected to come from the private sector.
PTI reports from Delhi:
Realtors hail move Realtors’ body CREDAI, on Tuesday, hailed the RBI’s move to ease norms for banks to raise long-term funds for financing affordable housing, saying this would lead to cheaper credit for such projects.
“It is a welcome step. This will lead to lower interest rates for affordable housing projects,” CREDAI Chairman Lalit Jain said.
Another realtors’ body NAREDCO Chairman Navin Rajeja said this would help developers to mobilise cheaper finance for development of affordable housing and will result into cutting in prices of housing in long term.
“It is expected that the home loan rates may also come down because of this move,” Mr. Raheja said.
Mr. Jain of Credai demanded that the housing sector should be given the infrastructure status and felt that Pune, Ahmedabad and Lucknow should have figured in the list of metropolitan cities.
