Plans by ICICI Bank and Axis Bank to set up non-banking finance companies (NBFC) with the status of an infrastructure finance company (or, IFC) may have hit a regulatory hurdle.
Both ICICI Bank and Axis Bank, the country’s largest and third-largest private sector banks, respectively, have submitted detailed proposals, including business plans, to Reserve Bank of India (RBI) as part of their applications.
RBI created the new NBFC-IFC (commonly known as infra NBFC) category in February. Financiers with 75 per cent exposure to the infrastructure sector qualify under this category. RBI recently gave infra NBFC status to Infrastructure Development & Finance Co and L&T Infrastructure Finance Co. These two are allowed to float infrastructure bonds with tax benefits, a fund-raising option not available to banks and other NBFCs.
In response to one of the bank’s proposals to float an infra NBFC, the banking regulator asked what an NBFC-IFC can do that a bank cannot.
ICICI Bank did not respond to email queries by Business Standard.
“Axis Bank is looking strongly at the infrastructure sector and wants to increase its involvement in the development of projects. The NBFC that will have specific focus on infrastructure-related activities will facilitate the involvement of Axis Bank in origination, advisory and development of such projects,” Axis Bank said in a written reply.
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However, the bank remained silent on whether the regulator is comfortable with the bank’s plan to form an infra NBFC. Axis Bank has an exposure of 18-20 per cent of its non-retail lending to this segment.
Industry sources point out that the growing asset-liability mismatch of banks forced them to adopt the infra NBFC strategy. “While banks’ liabilities are short-term in nature, infrastructure needs long-term commitments, for 15-20 years. In addition, NBFCs also have the advantage of not having to maintain cash reserve ratio or statutory reserve ratio like banks,” said the CEO of an IFC.
RBI data shows that deposits mobilised by banks indicated a shift towards short-term of up to one year and medium-term of up to three years in 2009-10. The central bank also said the asset-liability mismatch was noticeable for public sector banks in 2009-10.
“New private banks, which normally relied heavily on short-term deposits, exhibited a shift in favour of medium- and long-term deposits in 2009-10, while their loans moved to the short-end of the spectrum,” RBI had said in its Trends & Progress report for 2009-10, released earlier this week. About 79 per cent of bank deposits are of less than three years’ tenure.