To boost demand for infrastructure and housing, the Reserve Bank of India on Tuesday said banks would not have to maintain cash reserve ratio or statutory liquidity ratio and will not have to meet priority-sector lending targets for funds raised through bonds for extending credit to these sectors.
While the exemption from CRR and SLR requirements was announced by the Finance Minister in his Budget speech, the banking regulator further sweetened the deal by including loans for affordable housing.
Under the new definition of affordable housing, loans of up to Rs 50 lakh in metros for houses valuing up to Rs 65 lakh and those of up to Rs 40 lakh (Rs 4 million) for houses valuing up to Rs 50 lakh in all other cities are now part of affordable housing.
Real estate players are happy. “Any easing will be to people’s advantage. It will encourage people to go for own homes.
"It will increase demand for homes,” said Rajeev Talwar, executive director, DLF.
The incentives will reduce the cost of funds for banks as they do not have to set aside funds for CRR or investment in low-yielding government bonds with the funds raised.
If banks’ cost of fund is reduced, they can pass on the benefit to customers.
Housing companies expect loan rates to come down by 25-50 basis points, but only over the medium term.
Retail customers will have to wait for a while to get the benefit, as most banks offer home loans at base rate or with a marginal spread.
So, unless banks decide to cut base rate -- which is the function of both policy rate and cost of funds -- customers will not have any benefit.
Banks are not allowed to lend below the base rate, except for a few segments as specified by RBI.
In addition, banks will get full benefit of the leeway only in 2020, as suggested by RBI.
In his annual report address to shareholders, HDFC Chairman Deepak Parekh had suggested the central bank should increase the limit of priority-sector housing loans from the current Rs 25 lakh (Rs 2.5 million) in metro cities and Rs 15 lakh (Rs 1.5 million) in other centres.
Affordable loans account for around 40 per cent of HDFC’s loan book.
Experts said banks would be in a more advantageous position than non-banking financial companies offering home loans, as the latter are already exempt from CRR, SLR and priority-sector lending requirements.
“The difference in home loan rates between the two could be as high as 100 bps once banks realise the full impact of the incentive,” said a banker.
RBI, however, said the definition of affordable housing would change with the inflation trajectory. The inflation rate, particularly the retail one, has been high over the past two years.
It, however, fell to a 29-month low of 7.31per cent in June, data released on Monday showed.
Infrastructure companies said the move would lower funding costs for them and provide banks with the liquidity to fund long-gestation projects. Currently, infra funding leads to an asset-liability mismatch for banks, as most of their deposits are of two-three-year maturity, while infra assets mature over 10-15 years.
Infra companies, by comparison, face refinancing risks, which expose them to macroeconomic volatility.
The provision to do away with SLR and CRR requirements for funds raised through these bonds would lower banks’ cost of funding by 50-100 basis points.
This they could pass on to borrowers, especially top-rated companies, an analysts said.
Banks now can issue rupee-denominated bonds with tenures of seven years or more and the instruments would be unsecured in nature.
The bonds could be issued with either floating or fixed rate, but RBI barred cross-holding of such bonds.
In addition, the bonds would not be eligible for deposit insurance.
While there will be no restriction on the quantum of such bonds, the leeway will be restricted according to a formula proposed by the banking regulator.
The formula is that the leeway, the least for the current year, will be gradually increased every year and the entire fund raised through these bonds will be eligible for regulatory incentives in the year 2020.
The gradual benefit has been given so that such bonds do not flood the market and hamper prices.
RBI has observed that issuances of long-term bonds for funding infrastructure “has not picked up at all”.
Market participants already doubt the attractiveness of these bonds because of the Basel-III norms.
“The cost of borrowing for these bonds by a state-run ‘AAA’-rated bank shall work out to be about 9.40-9.50 per cent for a seven-10-year maturity tenure. But the investors’ appetite for these bonds are low.
The spread over the ‘AAA’-rated bonds does not work out to be very attractive for these bonds. This is because investors take these Basel-III-compliant bonds at a haircut over the price of the regular bonds.
In the past, LIC and EPFO invested in these bonds and now they are not willing to invest again,” said a bond issue arranger.
Insurance companies also seem to be in a wait-and-watch mode and emphasise on strong credit record of banks for the success of bond issuances.
MEASURES & IMPACT
Home loan incentives
No CRR, SLR and no priority-sector lending larget for home loans of up to Rs 50 lakh for property valued at up to Rs 65 lakh in metro cities and home loans of up to Rs 40 lakh for property valued at up to Rs 50 lakh in all other cities
IMPACT ON BORROWERS:
25-50 bps cheaper loan rate in the medium term Infra loan push
- No ceiling or floor on repayment period
- Tenor on amortisation schedule not to exceed 80% of the initial concession period
- Bank offering initial debt facility to sanction loan for 5-7 years
- Amortisation schedule could be modified once during the course of the loan, if it is standard asset
- Refinancing will stop if initial debt facility becomes NPA
- After loan becomes NPA, banks need to make necessary provisions
- Banks to decide pricing at each stage of sanction of the initial debt facility
IMPACT: Top-rated companies could get benefit of 50-100 bps on interest rate