 "Long-term tax-free bonds may aid banks' infra push")
The government is likely to allow banks to raise long-term tax-free bonds to fund infrastructure projects. A detailed announcement in this regard is likely to be made in the Union Budget to be presented on Thursday.
Bankers said these bonds would help banks raise long-term funds at lower costs, as well as aid them in asset liability management.
“It is good if tax-free status is given to bonds issued by banks to fund their infrastructure projects…Then, banks could attract retail savings into these tax-free bonds. It will also help banks raise low-cost resources. The cost of funding will come down by about 100 basis points,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.
A few banks say this move will help channelise the savings of retail investors to productive resources, rather than these flowing into investments such as gold. Besides, norms related to cash reserve ratio and statutory liquidity ratio aren’t applicable to these bonds.
However, a few experts believe not all banks will be allowed to raise long-term tax-free bonds. “Last year, banks had urged the finance ministry to raise long-term resources at competitive pricing. Banks such as National Bank for Agriculture and Rural Development and Small Industries Development Bank of India may be allowed. I doubt other commercial banks will be allowed. This is because if one commercial bank is allowed, other banks will wonder why they haven’t been permitted,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
Experts say it may be difficult for commercial banks to move a significant part of investments from retail term deposits to tax-free bonds. It is believed under the new government, other avenues such as takeover financing might get a boost, and this will benefit infrastructure projects.
FINGERS CROSSED
Bankers said these bonds would help banks raise long-term funds at lower costs, as well as aid them in asset liability management.
“It is good if tax-free status is given to bonds issued by banks to fund their infrastructure projects…Then, banks could attract retail savings into these tax-free bonds. It will also help banks raise low-cost resources. The cost of funding will come down by about 100 basis points,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.
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Currently, banks face concern on the asset-liability front---the tenures of their liabilities are shorter than those of the long-term loans given by banks for funding infrastructure projects. Besides, the cost of raising deposits is higher, as the Reserve Bank of India is yet to cut interest rates.
A few banks say this move will help channelise the savings of retail investors to productive resources, rather than these flowing into investments such as gold. Besides, norms related to cash reserve ratio and statutory liquidity ratio aren’t applicable to these bonds.
However, a few experts believe not all banks will be allowed to raise long-term tax-free bonds. “Last year, banks had urged the finance ministry to raise long-term resources at competitive pricing. Banks such as National Bank for Agriculture and Rural Development and Small Industries Development Bank of India may be allowed. I doubt other commercial banks will be allowed. This is because if one commercial bank is allowed, other banks will wonder why they haven’t been permitted,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
Experts say it may be difficult for commercial banks to move a significant part of investments from retail term deposits to tax-free bonds. It is believed under the new government, other avenues such as takeover financing might get a boost, and this will benefit infrastructure projects.
FINGERS CROSSED
- Banks had asked the finance ministry for raising long-term resources at competitive pricing in the past
- Long-term tax-free bonds will help banks to borrow at lower costs
- It will also lead to better asset-liability management for banks
- These bonds do not attract norms for setting aside amounts as CRR and SLR