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To encourage lending to infrastructure sector, Finance Minister Arun Jaitley said banks would be permitted to raise long-term funds with minimum regulatory pre-emption.
This will help banks fund projects at relatively lower interest rates and help them get over asset-liability mismatches.
‘Major constraint’“Long-term financing for infrastructure has been a major constraint in encouraging larger private sector participation in this sector. On the asset side, 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,” Finance Minister Arun Jaitley said in Parliament on Thursday.
On the liability side, Jaitley said, banks will be permitted to raise long-term funds for lending to infrastructure sector with minimum regulatory pre-emption such as Cash Reserve Ratio, Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL).
Arundhati Bhattacharya, Chairperson of State Bank of India, said, “Allowing banks to issue long-term bonds without recourse to statutory pre-emption (CRR/SLR) for financing infrastructure is a positive step. Allowing infrastructure loans to be given for longer periods matching the life of the asset (25x5 structure) is a big positive. It will prevent undue stress in repayment of infrastructure loans and will also reduce user charges.”
In the Budget speech, the Finance Minister also extended the eligible date of borrowing in foreign currency to June 30, 2017, from June 30, 2016 at a concessional tax rate of 5 per cent on interest payments. This has been proposed in order to augment low-cost, long-term foreign borrowings for Indian companies.
The move will see an increase in the flow of bank credit for a wide range of sectors including retail, infrastructure, MSME, agriculture, manufacturing and exports.
AdvantagesAccording to Harihar Krishnamoorthy, Treasury, FirstBank India, “The measure can solve the persistent problem of asset-liability mismatches that banks have been facing when funding long-term projects, as well as reduce their cost of funds which can be passed on to customers. It can help the banking system take deposit growth to healthier levels, enabling them to finance the credit growth that is anticipated.”
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