RBI easing norms for issuing infra-bonds is a positive step; the government should also provide tax incentives for individuals investing in these bonds
In response to the FM’s Budget speech which, among other things, stated “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)”, RBI on July 15 published guidelines for issuance of long-term bonds by banks. Banks issuing infra-bonds is not new, as this was permitted by RBI 10 years ago in 2004. But what is new this time is that there is no SLR/CRR and PSL requirement for such funds raised through infra-bonds.
As per the new guidelines, banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to long-term projects in infrastructure sub-sectors and affordable housing. The bonds would be rupee-denominated, in plain vanilla form, fully paid, redeemable, unsecured and without call or put option. It can be issued with a fixed or floating rate of interest. There will not be any restriction on the quantum of such bonds to be issued by banks; however, the regulatory incentives will be restricted to the bonds that are used to incrementally finance long-term projects in infrastructure and loans for affordable housing. However, this exemption will be subject to a ceiling of the eligible credit which will change every year. The formula given by RBI to arrive at such eligible credit (for the current financial year up to March 2015) includes all incremental credit to infra and affordable housing plus 16% of standard outstanding loans to these two sectors on the date of issue of RBI circular. The level of eligible credit will change every year depending upon the quantum of loan sanctioned to infrastructure and affordable housing sector.
Simultaneously, to boost housing sector, RBI has widened the definition of affordable housing. Under the new definition, loans of up to R50 lakh in metros for houses valuing up to R65 lakh and those of up to R40 lakh for housing valuing up to R50 lakh in all other cities are now part of affordable housing. Hitherto, housing loans given by banks to individuals up to R25 lakh in metros and R15 lakh in non-metros were considered as affordable housing loans. With the new provision of long-term bonds, it is expected that interest rate