Money & Banking

Banks must be allowed to issue tax-free infrastructure bonds

Parvatha Vardhini. C Anjana Chandramouly Bangalore | Updated on February 08, 2011

Mr S Raman, Chairman and Managing Director, Canara Bank. -Photo: G R N Somashekar   -  Business Line

It will also help reduce asset-liability mismatches, say bankers

Public sector banks, which fund a majority of the infrastructural financing needs, should be allowed to float tax-free infrastructure bonds, say bankers. Currently, infrastructure finance companies such as IDFC, IIFCL and IFCI issue such bonds.

“We have been repeatedly making representations to the government. Asset-liability management (ALM) issues can be handled by allowing banks to issue tax-free infrastructure bonds and not touching the CASA (current account savings account) ratio,” Mr S. Raman, Chairman and Managing Director, Canara Bank, told Business Line.

Though infrastructure lending and CASA appear far away from each other, he said that there was a huge invisible link between them. With term deposits having maturity of not more than two years forming 70 per cent of deposits of banks, banks needed CASA to lend for infrastructure.

Asset-liability mismatch

With infrastructure lending increasing and liquidity preferences changing over the years in favour of short-term deposits, “the government should allow banks also to issue tax-free bonds,” said Ms Shubhalakshmi Panse, Executive Director, Vijaya Bank. “When provided with tax benefits, the common man will come forward to invest in public sector banks' infrastructure bonds, and asset-liability mismatch will be reduced,” she added.

Though banking was all about managing asset-liability mismatches, Mr Raman said that nothing should be done to destabilise the CASA in each individual bank, which would otherwise be “jeopardised by deregulating savings account”. Ms Panse too pointed out that deregulation of savings bank account would lead to customers shifting their deposits periodically, which would again lead to asset-liability mismatch.

Through deregulation, “we are introducing a degree of volatility which is totally not needed for this stage of development in the country,” explained Mr Raman.

Outstanding credit

RBI data on sectoral deployment of credit points out that as on December 17, 2010, banks in India had an outstanding credit of over Rs 4.86-lakh crore to the infrastructure sector, registering a year-on-year growth of 43 per cent.

Considering the demand, the country might need much more infrastructure financing institutions, as “the 3-4 institutions which are here today can hardly scratch the surface,” he said. “And if infrastructure financing by banks is to continue, CASA should not be tinkered with,” added Mr Raman.

Commenting on the prospect of banks offering infrastructure bonds, infrastructure finance company IIFCL's CEO, Mr Pradeep Kumar, said that it was an issue between the government and the banks. “While banks can raise money through deposits and low-cost CASA, these avenues are not available for us,” he pointed out.

Published on February 07, 2011

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