IBA demands easier norms for lending to infra sector

MUMBAI: The Indian Banks’ Association (IBA) has asked for regulatory sops for extending loans to the infrastructure sector for which $514 billion of funding is envisaged under the 11th Five Year Plan. Banks have asked the regulator for fiscal sops to enable them provide 43% of the required funding as envisaged under the plan.

IBA has also made a plea for a credit guarantee fund to secure education loans of up to Rs 4 lakh since current norms do not allow banks to seek security despite the possibility of defaults. Speaking at the inaugural session of Bancon 2009, MV Nair, chairman, IBA said that banks will need to play a much larger role in infrastructure funding. The share of bank finance in infrastructure in gross bank credit has increased from just 1.8% in 2001 to 10.2% in 2009 and is expected to go up further.

Mr Nair said that the constraints faced by banks in stretching their exposure to infrastructure financing can be put under three major heads viz., asset-liability mismatch (ALM), exposure limitations and pricing. Banks have short-term resources and infrastructure projects have long gestation periods. This creates an ALM mis-match for banks. Banks have been asking permission from the Reserve Bank of India (RBI) for raising funds by issuing long-term bonds. RBI has, however, told banks that they should not get into long-term commitments and try to get out of the loans in a few years using take-out financing.

The other problem that banks face is that of exposure limits. “In the case of exposure norms, most banks are nearing the prudential exposure limits fixed by RBI and sectoral caps set by bank boards from the risk management angle. Since the number of established developers are limited, group exposure limits of even larger banks are becoming inadequate to fund new projects” said Mr Nair.

Also, once credit picks up, banks feel that pre-emption of deposits will start putting pressure on capital.
At present, out of every Rs 100 that banks raise as deposits Rs 25 has to be invested in government bonds and Rs 5 has to be parked with RBI to meet the cash reserve ratio (CRR) requirement.

“For banks to lend more to infrastructure projects certain measures in the form of fiscal incentives like tax incentive to the investors and issuers, exemptions from statutory pre-emptions and modification in the existing IIFCL refinancing models are needed,” said Mr Nair.