The Hindu Business Line : Now, infrastructure projects can look to more funds

CHANGES in credit exposure norms by the Reserve Bank of India should help banks place more funds in infrastructure projects promoted by public and private sectors.

Till date, banks were allowed to assume single or group borrower credit exposure up to 15 and 40 per cent of capital funds (Tier 1& Tier 2 capital) respectively, with an additional allowance of 5 and 10 per cent of capital funds for infrastructure. Some banks have been breaching these limits and approaching RBI for a case-to-case okay, which was given.

But most of the time RBI was not aware of the genuine need for funds and had to depend on banks and borrowers. To get over the needless anomaly, the RBI has okayed a maximum of further 5 per cent of capital funds "subject to the borrower consenting to the banks making appropriate disclosures in their Annual Reports." Effectively, for a single borrower the exposure limit will be 25 per cent and for a group it will be 55 per cent. More importantly, these exposure limits will not matter when bank funding is fully guaranteed by the Government of India. Essentially, public sector projects like NTPC with government guarantee can be funded by banks free of limits. But this does not imply any dilution in provisioning norms. With banks also allowed to float long-tem bonds "with a minimum maturity of five years to the extent of their exposure of residual maturity of more than five years to the infrastructure sector," infrastructure should get a boost, though one is not sure of the tax status of these bonds in the hands of the investor.

The RBI help comes when the performance of infrastructure industries "was generally lacklustre in 2003-04 with some improvement in February and March 2004," says the RBI.

The sector where the response of the RBI can be termed insufficient is agriculture though it has done the right thing by banning microfinance institutions (NGOs) from accepting public deposits. They can if they convert themselves to an NBFC bound by RBI. There is no restriction on SHGs, mainly run by women, pooling deposits to on-lend to themselves. Banks can now waive margin/security requirements for agricultural loans up to Rs 50,000 and in the case of agri-business and agri-clinics for loans up to Rs 5 lakh.

But what hurts is a farmer taking a Rs 50,000 farm loan has to pay 9 per cent while an urban dweller can get a car loan at less than 8 per cent. This asymmetry has to go.

At this point one needs to refer to the point made by Mr Jaswant Singh while presenting the interim budget in February. He had said: "Traditionally, banks have sought relatively higher security on credit for agriculture. To illustrate, banks insist on mortgaging the entire land holding of a farmer borrower, as security for advances for agricultural purposes. Banks are, therefore, now being advised to assess individual credit-worthiness and to not routinely insist on additional collateral through a mortgage of the entire land holding. As a principle, collateral security should be proportionate to the value of the loan."

Generally, this rule is not applicable. When will banks spread the tabernacle for the farmer to sup with the corporate?

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