In an effort to address the shortage of long-term debt funding for the infrastructure sector, the Union government is fast tracking a proposal that will remove disparities in treatment given to loans for infrastructure projects and bonds issued by infrastructure firms or project consortiums.
They are part of the Deepak Parekh Committee report on infrastructure financing, that was submitted to the finance ministry earlier this year.
The finance ministry is currently “sorting out the important proposals and fast-tracking them,” a finance ministry official, who did not wish to be identified, said. “We have had two meetings and the RBI (Reserve Bank of India) has finally come around. We are trying to get them to announce the new norms sooner. They
currently expect to announce the measures in 2008.”
Assessing impact: Noida Toll Bridge Co. president and CEO Pradeep Puri says if banks and other financial institutions can subscribe to bonds without affecting prudential norms, it is a good development.
Currently, RBI caps banks’ exposure to unlisted corporate bonds, debt issued through private placement, to 10% of its non-statutory liquidity ratio investments, while there is no similar cap on loans extended to infrastructure projects.
Statutory liquidity ratio refers to the government mandated minimum amount banks have to maintain in the form of cash, gold or approved government securities.
The finance ministry has urged RBI to ease restrictions on banks’ investments in corporate bonds, a finance ministry official, who did not wish to be quoted, said.
“Instead of waiting for the market to measure and then announcing norms, the government is taking this way. The measures would create a level playing field between loans and bonds and help develop the bond market,” said Akashdeep Jyoti, who heads corporate and infrastructure ratings for Crisil Ltd.
With infrastructure projects’ funding requirements ranging from 10 to 20 years, analysts say the move could address the shortage of long-term debt financing for infrastructure projects in India. Currently, most loans have five to seven-year tenure, while the industry needs 15-20 year debt, analysts say. The infrastructure sector is expected to receive around $320 billion (Rs13.02 trillion) in investment by 2012.
The recomendations could also have the added benefit of increasing liquidity in the country’s shallow debt market, according to analysts. In 2005-06, Indian firms raised Rs245 crore through public issue of debt, and Rs96,369 crore through private placements.
“Fundamentally, the (infrastructure) industry needs long tenor (long-term) money, which is currently not available in India. If banks and other financial institutions can subscribe to them (bonds) without affecting the prudential norms, it is a good development,” Noida Toll Bridge Co. Ltd president and chief executive officer Pradeep Puri said.
However, some others have expressed caution.
R.H. Patil, chairman of The Clearing Corp. of India Ltd, and head of the high-level expert committee appointed by the government, that submitted its report on the corporate bond market in December 2005, said, “Banks should be allowed to invest in unrated bonds only when they have the credit appraisal system in place. They must build the capability of risk analysis and know where they are investing.”
Analysts argued that since risk is taken care of in both forms of debt financing (through a trustee in the case of bond issues), they should be given equal treatment to help develop the bond market and increase financing options for infrastructure projects.
“Loans made to infrastructure projects are non-recourse loans anyway. If a project fails, they (lenders) cannot go to the promoter and ask for the money back,” Puri added.
The report also suggests that banks be allowed to classify their long-term infrastructure bonds under the held-to-maturity category. Currently, banks’ bond portfolios are subject to mark-to-market regulations that require them to assign a value to their bond holdings based on the current market price of similar holdings.