Parekh panel for debt leeway

To enhance participation of banks and financial institutions in infrastructure financing, the seven-member Deepak Parekh Committee has recommended several policy changes including permitting the institutions to invest in unrated bonds, borrowing overseas for onward lending to projects and relaxing statutory liquidity ratio norms.

The committee report, submitted to Finance Minister P Chidambaram last week, is a set of important policy recommendations aimed at attracting massive funding requirement ($ 475 billion according to the panel) for improving the country's infrastructure over the next five years.

Current regulations do not allow banks to invest in unrated corporate bonds or in unlisted debt papers beyond 10 per cent their total non-statutory liquidity ratio.

However, no such restrictions exist on loan financing, biasing banks towards such funding. The panel has recommended relaxing these norms so as to allow banks to invest in unrated bonds and unlisted papers issued by infrastructure companies.

"If such bond investments are recognised as part of statutory liquidity ratio (SLR), then banks could invest more in infrastructure sector," said Allen C A Pereira, executive director of Oriental Bank of Commerce.

The panel has also suggested that banks be given an option to classify investments in infrastructure related bonds (with a tenor of above 5 years) under held to maturity category (HTM).

"Under available for sale norms, banks are required to provide capital for credit risk, market risk and mark to market losses. But in HTM category, banks will only provide capital for credit risk. This will reduce the cost and encourage banks to invest in infrastructure bonds," said Arun Kaul, general manager (Treasury and Finance) in Punjab National Bank.

Long term funds are not easily available in the domestic market. The Panel suggested necessary regulatory changes to allow financial intermediaries, such as banks and FIs and NBFCs, to raise foreign currency borrowings with tenors of 10 years for on-lending to infrastructure sector.

At present, these institutions are not allowed this facility, that creates overseas liability for them but not for infrastructure projects.

Under RBI guidelines, banks maintain 25 per cent of their demand and time liabilities as SLR, leaving less resources for lending and making profit.

The panel has recommended that long term resources raised by banks from domestic and overseas markets, having at least 10 year tenor, should have no SLR requirement. "If implemented, it will be an incentive for increasing lending to long term projects," Kaul said.

To facilitate securitisation of infrastructure assets to investors, the committee recommended that pass-through certificates be recognised as "security" under the Securities Contract Regulation Act, 1956, to enable financial intermediaries to list such assets and spread the risk.

The committee also suggested that banks should be allowed to issue fixed term gold deposit certificates to raise resources to finance long term projects.

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Parekh for a robust debt market

No regulatory asymmetry between loans and bonds

Introduce credit derivatives and allow foreign investors to trade in such in them

India Infrastructure Finance Company should be allowed to invest in securitised papers related to infrastructure companies

Private placement of bonds should be limited to Qualified Institutional Bidders only

Develop over-the-counter market for trading in privately placed debt securities

Implement key recommendations of the R H Patil Committee