More banks likely to sell infra bonds for funds, say experts

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After Bank of Baroda and ICICI Bank, more lenders are likely to announce plans to sell infrastructure bonds to raise funds, experts say.

On September 5, ICICI Bank said it is likely to raise up to Rs 10,000 crore through infras bonds for project financing and affordable housing.

In August, Bank of Baroda said it planned to raise at least Rs. 500 crore through a sale of infra bonds.

Banks are likely to find infra bond sales an efficient and quick way of raising money to fund projects in the face of rising interest rates. Banks with already high liabilities are expected to follow the trend early.

“Banks will do more such issuances and other banks will also follow the trend. Banks like SBI which have a very low cost of liability because of the  CASA,  I don't expect such banks to go for infra bonds but other banks especially private ones will do,” added Ajay Manglunia, Managing Director at JM Financial.

What advantages do such bonds offer?  

Such bond proceeds are exempt from Cash Reserve Ratio (CRR), or the amount of cash that banks must hold in reserve against deposits made by their customers, statutory Liquidity Ratio (SLR), or the percentage of deposits that banks must hold in government securities, and lending to priority sectors such as agriculture.

This helps reduce the banks’ cost of funds and increase the money available for lending.

“As liquidity in the system becomes scarce, this could prove to be an attractive way to raise funds for the banks. Moreover, it should positively impact the asset-liability management of banks focused on infrastructure lending,” said Aniket Dani, Director at CRISIL Research.

The recent sale of infrastructure and affordable housing bonds by Bank of Baroda at 7.39 percent for a tenor of 7 years has shown banks that they can raise long-term money at very fine rates over the prevailing 10-year G-sec rates. It has motivated them to raise money through infra bonds, experts said.

Alongside, banks need to cater to the demand for infra financing, and infra bond sales can help them in that direction as well.

“Infra bonds are free from SLR maintenance so they are not counted in the banks' Demand term liabilities. So, the obligation towards NDTL calculations becomes efficient,” said Manglunia.

Banks are well placed to capture growth from both the infrastructure segment, which is a key push area for the government, and also target the affordable housing segment.

Affordable housing loans offer better product economics than large-ticket housing and are also posting strong growth, albeit on a small base.

“Raising funds using the infrastructure and affordable housing bonds which are long-tenor and currently available at attractive coupons will help them efficiently manage their asset-liability management along with managing margins,” added Dani.

Infra loans rise 

Within infrastructure, banks are targeting segments such as roads and renewable energy where the contours of the projects are much more favourable than in the past in terms of lower tenors and more clarity on from strong counterparties such as the National Highways Authority of India, experts said.

Banks are also aggressively competing for taking over completed and operational projects from other lenders.

As of July 2022, banks posted 11 percent Year-on-Year growth in infrastructure lending with sectors like power, telecom, roads, and airports clocking double-digit growth, according to bank data.

“Banks could be expecting this growth to continue and hence are raising funds to capitalize on the opportunity,” said Dani.

Last year bank lending to the infrastructure sector was comparatively flat in July 2021. But there has been a reversal of the trend this year and that has boosted the confidence of the banks, said the experts.

“The lending of banks to the infrastructure segment has been increasing and this is the primary driver of the revival and strong growth in the industry segment as shown in the Reserve Bank of India credit deployment data,” said Karan Gupta, Director, India Ratings and Research.