The Finance Minister had announced in the Budget that there would be impetus for long term bank lending to private sector infrastructure projects by providing for contingencies. He also mentioned that bank funds collected to lend to infrastructure would have a relaxation on SLR or CRR.

This has immediately been addressed.

Infra Lending Stretched Over Longer Term

RBI has, in a notification, allowed new loans to infra project financing to be split in a 5:25 scheme – where the viability of the project may be long (say 25 years) and therefore, the amortization of the debt may take that much time. Since banks can’t think that long – they can’t do 25 year borrowing to finance this – they want to divide the project into smaller chunks – say 5 years – with the hope that after that term, there will be a “bullet” repayment of the loan by takeout financing by other banks.

The RBI has allowed this kind of lending to happen without calling the takeout financing as a restructuring proposal if the loan is “standard” i.e. it’s not an NPA.

This is also going to be allowed only for what is called infrastructure (there are about 29 industries) and “core” industries (coal, crude, natural gas, steel, fertilizers, petro-refining, cement, electricity)

There are caveats, like that banks need to somehow account for the fact that the loan will not be “taken out” and they’ll have to manage liquidity closer to the date.

This is potentially positive for infra lending, and applies only for new loans.

Infra and “Affordable” Housing

In another notification, RBI has made life better for banks.

  • Banks can issue 7 year (or more) bonds to lend to either infrastructure sectors (defined here) or to affordable housing.
  • Affordable housing means loans under Rs. 50 lakh to individuals (house values limited to Rs. 65 lakh) in the big cities , and Rs. 40 lakh (values limited to Rs. 50 lakh) in other places.
  • Banks can’t cross-hold these bonds between each other
  • No call or put options on the bonds.

These bonds will get a specific exemption from calculation of CRR and SLR. The way that works is that the amount under these bonds are reduced from Net Demand and Time Liabilities (NDTL) calculations of the bank, which feeds into the SLR and CRR calculation.

For more details on how this works, read our detailed primer on CRR and SLR.

There is a complex formula for how much will be available for reduction. It’s not like banks can take bonds and not have SLR or CRR and use it for whatever they want. The reduction in NDTL will be restricted by the actual amount of infra or affordable housing lending they do.

Upper Limit of Reduction: The circular even tries to encourage new lending by allowing only 16% of all current lending to be allowable for CRR/SLR reduction till March 2015. “Current lending” means loans to infra or the affordable housing sector as of today, the date of the circular. Further:

  • for 2015-16: Only 30% of current lending to infra/affordable housing qualifies for CRR/SLR reduction
  • 2016-17: Only 44% of current such lending qualifies
  • 2017-18: Only 58% qualifies
  • 2018-19: Only 72% qualifies
  • 2019-20: 86% qualifies
  • 2020 onwards – the full amount actually lent to such areas qualifies.

Priority Sector Lending limits too apply as a percentage of total bank credit, net of a few things. Even that credit number is reduced by this above formula, so that the percentage remains the same, but it’s of a smaller amount.

However, nothing that becomes an NPA will qualify for reduction.

Impact: this is very good for banks in the longer term, and we can expect these bond issuances to come around soon. The question, though, is if there is appetite for a lot of these seven year bonds, and if banks will actually find the lower SLR/CRR attractive enough to raise the interest rate they offer on these bonds.

Housing Bubble Impact: 65 lakhs for metros isn’t really “affordable”, and neither is 50 lakh in other places. So it’s going to be middle class speculation frenzy on these houses. You can expect prices to start inching their way towards these limits in smaller towns. (Exception: in Mumbai and Delhi, you get nothing for these prices.)

I don’t know why RBI wants to put housing into this limit. Infrastructure was bad enough, but housing? We are simply NOT going to learn. The west nearly died because of their housing bubbles, and we are doomed to go down the same way. Sure, not right now, but this is just setting it up for the (near) future.

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