Banks are making a strong pitch to the government for permission to issue tax-free bonds to fund infrastructure projects. Bankers, who are expected to again take up the issue with the finance ministry next week, are arguing that the bonds will help them raise long-term resources and reduce dependence on retail fixed deposits, whose maturity is getting shorter. In recent months, banks have been saddled with deposits in the one-year maturity bucket, while infrastructure loans have a tenure of 15-20 years.
“If our cost of funds is 10 per cent, lending is going to happen at 13 per cent. But 13 per cent is unviable for infrastructure developers,” said the chairman of a large public sector bank.
Even last year, the Indian Banks’ Association (IBA) had made a strong pitch for permission to issue tax-free bonds. Bankers were hopeful of amendments to the Finance Act in the Union Budget.
At present, infrastructure companies are allowed to float tax-free bonds. In the last Budget, after a lag of several years, the government had allowed Indian Railways Finance Corporation to issue tax-free bonds. In December last year, it allowed India Infrastructure Finance Company to raise Rs 10,000 crore through such bonds. IIFCL raised the funds in March at 6.85 per cent. The National Highways Authority of India was also allowed to raise Rs 4,000 crore via tax-free bonds. With a steady fall in deposit rates over the last one year, most retail fixed deposits are coming in the one-year category. For some banks, one-year deposits constitute 70 per cent of the total fixed deposits. On the other hand, credit demand was mainly witnessed in infrastructure and home loans, the tenures of which are 15-20 years.
With the policy makers asking banks to beef up infrastructure lender, bankers fear the mismatch in asset liability profile to further widen.
“Loans to infrastructure constitute 11-12 per cent of the total loan currently. We expect this figure to go up to at least 20 per cent over the next five years, which means incremental growth for project financing will be much higher,” said a senior banker.