Financing of Infrastructure and Affordable Housing

Issue of Long Term Bonds by Banks

Issue of Long Term Bonds by Banks – Financing of Infrastructure and Affordable Housing

In the Union Budget 2014-15, presented on July 10, 2014, the Hon’ble Finance Minister announced that:

“131. 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. On the liability side, banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).”

2. While flexible structuring for long term loans to infrastructure sector on the asset side of the banks’ balance sheets is dealt with separately vide our circular DBOD.BP.BC.No.24 /21.04.132/2014-15 dated July 15, 2014, this circular addresses the liability side of the banks’ balance sheets; raising long term funds for lending to key infrastructure.

3. Apart from what is technically defined as infrastructure, affordable housing is another segment of the economy which both requires long term funding and is of critical importance. Government has stressed the importance of availability of cheap credit to make housing affordable for the Economically Weaker Sections (EWS), Lower Income Group (LIG) and Medium Income Group (MIG) segments of the population. Accordingly, the Reserve Bank intends to ease the way for banks to raise long term resources to finance their long term loans to infrastructure as well as affordable housing. This will help promote both growth and stability, as well as improve the supply side.

4. In this context, a reference is invited to our circular DBOD.No.BP.BC.90/21.01.002/2003-04 dated June 11, 2004 on ‘Issue of Long-term Bonds by Banks’, whereby banks were allowed to issue long term bonds (other than which qualify as Tier II capital) with a minimum maturity of 5 years to the extent of their exposure of residual maturity of more than 5 years to the infrastructure sector, in order to facilitate banks to raise long-term resources for funding their long-term commitments and concurrently to assist banks in reducing asset-liability mismatches in the longer term maturities.

5. While banks have been raising resources in a significant way by way of issuance of Tier II capital bonds, it is, however, observed that issuance of long term bonds for funding loans to infrastructure sector, has not picked up at all, even though both are similar in terms of minimum tenor and application of reserve requirements.

6. In view of the above observations and in order to ensure adequate credit flow to infrastructure sector as also towards the affordable housing needs of the country by encouraging banks to optimally utilize the long-term financing avenues already available to them to finance their lending to these sectors, the prudential guidelines on this issue have been reviewed with a view to minimize certain regulatory pre-emptions. Accordingly, instructions given in the above-mentioned circular dated June 11, 2004 have been modified and the revised guidelines for issue of long-term bonds are given in the Annex to this circular.