Banks have indicated to the Finance Ministry that they can step up flow of funds to the infrastructure sector provided the banking regulator relaxes investment norms.

To encourage investment in bonds issued by infrastructure companies, banks want the Reserve Bank of India to allow them to use these bonds for collateralised borrowing and lending. If allowed, banks can offer the bonds as security to borrow from counterparties (market repo) under the Clearing Corporation of India’s collateralised borrowing and lending platform in times of liquidity crunch.

The counterparties, among others, will include banks, financial institutions, insurance companies, mutual funds, and provident/pension funds. Using infrastructure bonds as security for borrowing is one of the suggestions given by banks in response to feedback sought by the Ministry on whether the current investment policies were conducive.

HTM category

Banks have suggested that the RBI should allow them to classify investment in infrastructure bonds of three-five years maturity in the ‘held-to-maturity’ (HTM) category of investment classification. If allowed, they will not be required to make any provision should the bonds depreciate in value. The above measure will not only encourage infrastructure companies to float bonds of relatively shorter duration (3-5 years) but also help banks overcome asset-liability mismatches arising from loans being of longer duration than deposits.

Currently, infrastructure bonds can be classified under the HTM category only if they have a minimum residual maturity of seven years. Another issue that banks have flagged with the ministry is the need to have credit enhancement support from the government in the case of bonds issued by infrastructure companies in the public sector. Similar support should also be forthcoming from banks/ financial institutions in the case of bonds issued by private sector players. Banks will also be willing to step up investment in infrastructure bonds if a credit default swap (CDS) market is developed, said a banker clued in to the feedback given to the Ministry. CDS is a derivative product whereby the buyer of the swap receives credit protection, while the seller of the swap gives a guarantee that the buyer’s investment in bonds will be made good should the bond issuer default.

Investment policies

Another reason for hindrance to the flow of investment into the infrastructure sector is that investment policies of most banks restrict investment to bonds with a minimum rating of ‘AA’ or ‘A+’, whereas infrastructure company bonds at best are rated as ‘BBB+’. Bankers want the cap on exposure to individual/ group borrowers to be increased as most banks are on the verge of breaching the exposure limits in some sub-sectors within the infrastructure sector. Many banks have almost reached the cap in the case of power sector.

According to the Planning Commission, the total investment in the infrastructure sector, including roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation, would be over $1 trillion (or Rs 55 lakh crore) during the 12th Plan period (2012-17).

Finding this level of investment will require larger outlays from the public sector, but this has to be coupled with a more than proportional rise in private investment.

> ramkumar.k@thehindu.co.in

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