According to sources, the Reserve Bank of India has asked the government to permit banks to raise long-term funds through infrastructure-bond issues. The Reserve Bank last week sought banks' outlay for infrastructure investments in the current year. The suggestion for issue of infrastructure bonds, it is learnt, came from the central bank. The banks had expressed their inability to commit large proportion of their funds on infrastructure investments owing to the ensuing maturity mismatch in their portfolio. The move to allow banks to raise long-term resources through issue of tax-free infrastructure brings them almost on par with financial institutions. This will also bring in competetive pressures oninstitutions in their resource raising plans. Banks -- with their large retail network across the country -- enjoy distinct advantages over financial institutions on the resource-raising front. Both IDBI and ICICI tapped the market last year with tax-free infrastructure bonds. Promoters of infrastructure projects are also likely to be active in the market with tax free-infrastructure bonds. They are encouraged by the resounding success of Reliance Telecom's Rs 700-crore infrastructure bonds issue last year. Reliance Telecom was the first infrastructure company to tap the market via this route.

While banks have only the corpus of savings deposits as a stable resource base, the minimum loan maturity for infrastructure projects could be any where between 10 and 15 years. Faced with dull credit off-take from the manufacturing sector, a few banks had taken large exposures to infrastructure sector last year. According to bankers, this is not sustainable as large exposures in infrastructure financing will triggermaturity mismatches. Banks' ability to manage any maturity mismatch primarily depends on the corpus of savings deposits which offers the most stable resource base. Besides, between 20 and 25 per cent of term deposits is rolled over offering banks a permanent cushion of liquidity. The State Bank has kept its long term prime rate (LTPR) lower than its PLR as it sources long-term funds primarily from its savings deposits on which the cost of funds is the minimum.The demand for funds in the infrastructure sector is expected to take off in a major way this year with many projects in power, telecom, ports and roads in the process of tieing up funds.

Sanctions by Japan and US is expected to affect many of them, especially those which have contracted equipment supply from these countries and were depending on guarantees provided by the J-Exim and the US Exim Bank.

Consequently, the pressure on domestic resources for funding these long gestation projects is expected to increase.

INSIGHT

Plannedmove may spark off rate war between banks and institutions

That the government and the central bank are giving serious thought to infrastructure financing can be judged from the fact that no sooner there was a possibility of slowdown in funding, alternative plans are being put in place. With the wide network and reach the banks enjoy, allowing them to issue tax-free infrastructure bonds might just be what the doctor ordered; in other words, the sanctions was a blessing in disguise for the banks. Considering the huge requirement of funds for infrastructure development, it will have to be seen whether the entire demand can be fulfilled. For the banks, it would mean that the maturity mismatch, which was a thorn in long-term financing, could be done with.

However, allowing the entry of banks could lead to a direct confrontation and a interest rate war between banks and financial institutions.