Mumbai: The central bank has made policy changes that would leave banks with more money to lend to the infrastructure sector.
In its annual policy released on Tuesday, the Reserve Bank of India (RBI) has allowed banks to set aside lesser capital for bad loans from the infrastructure sector, freeing more money for lending. These so-called “substandard” loans will attract provisioning of 15%, down from 20% earlier.
RBI has also allowed banks to hold bonds issued by infrastructure firms until maturity. Banks can do this by classifying infrastructure bonds with maturity tenures of seven years or more under the held to maturity (HTM) category, protecting their investments from daily trading risks.
Infrastructure stocks rose following the announcement, although RBI also increased its policy interest rates by 25 basis points. One basis point is one hundredth of a percentage point.
Shares of infrastructure firm Roman Tarmat Ltd rose 9.93% on the Bombay Stock Exchange on Tuesday, Nagarjuna Constructions Co. Ltd by 6.28% and Purvankara Projects Ltd by more than 5%. The benchmark Sensex index ended up 0.34% at 17,460.58 points.
“Lowering of provisions for substandard loans and also the fact (that) they have changed the classification of build-operate-transfer (BOT) projects to secured from unsecured will help free up more money for the sector,” said M.D. Mallya, chairman and managing director, Bank of Baroda.
The reclassification of BOT projects will help infrastructure firms raise more money, Virendra Mhaiskar, chairman and managing director, IRB Infrastructure Developers Pvt. Ltd, told Reuters.
“This has been a long-pending demand of the industry... because unless it is considered as a tangible asset the rating for these instruments would not improve,” he said.
The sector saw the fastest growth in credit in 2009-10. “Infrastructure as a sector has grown 42%, faster than any other,” said Dharmakirti Joshi, principal economist at rating firm Crisil Ltd.
“Ideally, RBI would like to develop some sort of a long-term financing through the bond market for the sector, but since that is not possible quickly, they are using these small steps,” he said.
Parvez Umrigar, managing director at Gammon Infrastructure Projects Ltd, said RBI’s moves reinstate the intent of policymakers to push infrastructure projects.
“The political and policy environment is in favour of the sector and overall, it looks on strong wicket,” he said.