The Reserve Bank of India announced last week that it would allow banks to purchase bonds issued to finance long-term infrastructure projects from one another.
The move cancels a ban the institution issued in August last year – in a bid to avoid circular trading – that triggered a fierce bout of governmental and industry lobbying.
It follows a directive issued by the Bank in December last year which provided domestic commercial banks with more flexibility in structuring and refinancing project loans to infrastructure projects with an aggregate risk exposure of ?5 billion (€63 million; $78 million). The directive was at the time seen as a palliative measure to the restriction.
“On a review, it has been decided to allow banks to invest in such bonds issued by other banks,” the RBI said in its first bi-monthly policy statement for 2015-2016.
The RBI’s policy revision is expected to bring impetus to the government’s efforts to unlock economic growth by speeding up infrastructure projects currently on stand-by. The government had estimated in the third quarter of last year that the potential earnings from such bonds could range from $8.3 billion to $9.9 billion for the fiscal year.
In July last year, the Central Bank allowed banks to issue long-term bonds (LTBs) for lending to infrastructure projects and affordable housing but banned the cross-holding of such bonds. The Central Bank communicated then its confidence that other institutional investors, such as pension funds, insurance companies and mutual funds, would step in to provide the market with the necessary liquidity.
The flexibility newly introduced yesterday by the institution is a tacit acknowledgement that this assumption may have been premature. But it still came with conditions attached: banks' investment in bonds will not be treated as “assets with the banking system in India” for the purpose of calculation of total deposits”, the statement read. Single bank's holding of bonds in a particular issue will also be subject to certain limits in relation to the bond issue size.
“Its aggregate holding of such bonds will also be subject to certain limits in relation to its own assets. Long term bonds held for trading will reduce the bank's priority sector and liquidity benefits obtained from its own issuance of LTBs,” the RBI said.
The central bank announced more detailed guidelines would soon follow.
Separately, in a bid to expand the nature of projects in which infrastructure debt funds can lend, the RBI also proposed allowing them to provide take-out financing for infrastructure projects that have completed one year of operation in the Public-Private Partnership segment without a tripartite agreement.