By Ruma Dubey

The RBI actually rung out the bears today and slowly ushered in the bulls, once again.

Yesterday, RBI made some key announcements for the infra and core sector and there is great cheer today, with IDFC probably being the happiest.  The sops also includes affordable housing  projects being allowed to raise cheaper loans.

A quick look at what the RBI gave: (the same rules applicable to infra, now applicable to affordable housing loans)

• Money raised by banks through long term bonds for loans to infra firms to be exempt from Cash reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements which other bank deposits are subject to.
• These long term bonds exempt from meeting priority sector lending targets for banks.
• These long term bonds cannot have call or put option.
• 25-year loans to fund public works such as roads and ports – such loans can be refinanced every 5-7 years, provided project meets all guidelines and has not turned into a NPA.
• Refinancing can be done by the existing bank, a new set of banks or even via the bond markets.
• Such refinanced loans not to be considered as ‘restructuring’  which otherwise  will attract higher provisioning and more bad debt classification.
• No upper or lower cap set on the amount of funds banks can raise through these long term bonds, with no ceiling price on repayment terms too.
• Minimum maturity period of bonds, which will be only rupee denominated to be 7 years, could carry fixed or floating rate.
• These long term bonds not eligible for deposit insurance .
• Banks to fix amortization schedule of infra loans at project appraisal stage, wherein amortization cannot be more than 80% of the project life.
• Banks are now allowed to refinance loans to classified core infra sectors.

In terms of affordable housing loans, which will come under priority sector lending, RBI has stipulated norms for housing loans to individuals upto Rs.50 lakh for houses of values upto Rs.65 lakh located in six metros – Mumbai, Delhi, Kolkatta, Chennai, Bengaluru and Hyderabad.  And housing loans upto Rs.40 lakh can be given for houses of values upto Rs.50 lakh in other centers for purchase or construction of dwelling unit per family.  It will take a while for these benefits to ‘affordable housing’ to percolate, so one does not see any immediate benefit on this announcement as of now.

On the other hand, sops for infra sector is applicable from yesterday, 15^th July. This norm for long term lending was long overdue. Currently infra companies borrow with a tenure of 2-3 years while the gestation period for their assets maturity is around 15 years. This mismatch, often leading to re-financing, exposing them to vagaries of macroeconomic factors and volatile interest rates, will now be removed.  This facility will be allowed only for loans sanctioned after 15^th July and will not be extended to existing projects or even those currently under implementation.  This means that companies like JP, GMR, GVK will have to seek new loans and they will continue to pay the same on their other loans.

This will give great impetus to infra build too. Companies have not been putting up new projects due to the general economic conditions and high interest rates. Probably, this move by RBI will now encourage companies to seek new loans and start once again rebuilding India.

The move on no CRR and SLR limits for banks lending to infra will go a long way in removing undue stress from the system. CRR is the minimum proportion / percentage of a bank’s deposits to be held in the form of cash. Banks actually don’t hold these as cash with themselves, but deposit the same with RBI / currency chests, which is considered equivalent to holding cash with themselves. When a bank’s deposits increase by Rs. 100 crore, and considering the present cash reserve ratio of 4%, bank will have to hold additional Rs. 4 crore with RBI and will be able to use only Rs. 96 crore for investments and lending. Therefore, higher the CRR, lower the amount that banks can lend. 

SLR is the minimum percentage of deposits that a bank has to maintain in form of gold, cash or other approved securities. It is the ratio of liquid assets (cash and approved securities) to the demand and term liabilities / deposits. RBI is empowered to increase this ratio up to 40%, which thankfully is now at 22.5%. An increase in SLR restricts the bank’s leverage position to pump more money into the economy, thereby regulating credit growth.

Thus by removing this limit on CRR and SLR for infra lending, to a large extent, this will free up the banks and maybe cause lesser stressed assets.

All in all, RBI has made the right moves but the fact remains that current large infra companies balance sheets will remain stressed. And the fact also remains that for infra projects – availability of land and approvals are the bane, not money. Thus companies will flock for finance only if the Govt makes moves to clear these obstacles – that alone can give major impetus to the infra sector.

For more details on these RBI moves, go to http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=31626