With investors steering clear, infra bonds by banks may see early death

MUMBAI: Infrastructure bonds by banks, launched more than a year ago with the objective of raising resources to finance long-term loans for projects and affordable housing, may see an early death as poor rewards are restraining investors and issuers are struggling to deploy funds in a sector that’s yet to see demand grow.

The bonds offer interest rates as high as 11.15 per cent with seven to 10-year maturities. Large to mid-size lenders including ICICI Bank, Axis Bank, IDBI Bank, Kotak Mahindra Bank, Andhra Bank and Bank of Maharashtra collectively sold about Rs 16,000-20,000 crore worth of such debt securities more than a year ago.

“Investors like provident funds mostly avoid infra bonds as the risk-rewards are not commensurate,” said Amit Gopal, senior vice-president at India Life Capital, an advisor to more than 100 standalone such funds. “Vanilla bank bonds are preferred over infra bonds as there is no cash-flow risk linked to individual projects. Infra securities are offering only about 30-40 basis points higher than normal bank bonds.” Provident funds do not find infrastructure bank bonds the right investment — given their unsecured nature — as employers would have to bear any loss that may be incurred out of a default. The cost of infrastructure bonds also is high for banks, which have so far paid in the range of 8.80-11.15 per cent, exceeding bank deposit rates.