Going by the large quantum of NPAs and recast loans, banks have burnt their fingers badly in infra financing over the last decade or so. While several of the projects have been derailed because of delayed clearances or the lack of fuel linkages, there are instances of promoters having stalled the venture either because they haven’t been able to cobble together the equity contribution or because the project is no longer viable. Either way, banks clearly failed to assess the risks with regard to both the project and the promoters. In the first place, however, it was never fair to ask banks to shoulder the responsibility of funding infra projects given their liabilities are of a short-term nature whereas the loans need to be of much longer durations. Moreover, since the banks wanted to recover the money in about ten years, they were pricing in higher returns which backfired because all that happened was that the loans slipped. RBI has now made it easier for them by increasing the life of loans to a longer 25 years and allowing a refinancing, on fresh terms, every five to seven years. That will make it easier for the promoters since the repayment schedule will be more closely aligned with the life-cycle of the project and, in turn, should lower the risk of the loan becoming impaired since it will be correctly priced.
In order to help banks fund long-gestation projects, the central bank has now allowed banks to raise long-term money with a minimum maturity of seven years and without any calls or put options. And to bring down the cost of funds, RBI has freed these bonds from regulatory requirements such as SLR, CRR and priority sector lending. The tricky part is that the bonds are unsecured and, therefore, it is not clear whether institutional investors such as insurance companies and pension funds are permitted to buy them, even though their comfort level with government-owned banks is not in question. Also, since the bonds are of a long tenure and don’t attract any tax breaks, retail investors would be looking for a fairly high rate of return, certainly upwards of 10% in the current environment. That then would eat into the savings created by the absence of regulatory requirements—estimated at around 75-125 basis points depending on their liability profiles—and may not leave banks a large enough margin to warrant raising the