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India proposes specialised infra banks

The idea is to turn the private sector into a long-term financing source to fund the country’s massive $1.5trn infrastructure gap, as commercial banks struggle with stressed assets on their balance sheet.

The Reserve Bank of India is proposing to issue new bank licences to private sector players in a bid to create long-term institutions to fund infrastructure projects in India. 

In a discussion paper released last week, the country’s central bank said the proposed “wholesale and long-term finance (WLTF) banks” will focus primarily on lending to the infrastructure sector and small and medium-sized corporates. 

“Specialised banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing,” explained the RBI. They are expected to mobilise liquidity for banks and financial institutions through securitisation of priority sector assets and actively trading them. Also, WLTF banks are expected to help banks refinance loans and will be present in the capital markets as aggregators. 

One key advantage of such entities would be to moderate the current asset-liability mismatch experienced by commercial banks with long maturity assets on their books, especially since many Indian banks are saddled with non-performing and restructured infrastructure assets. On the flip side, WLTF banks would carry substantial credit-concentration risk by dint of being heavily exposed to the industrial, commercial and infrastructure sectors.

An initial minimum paid-up equity capital of at least 10 billion rupees ($154 million; €146 million) will be required for this new type of institution, said the RBI. The sources of funding for WLTF banks will come from a combination of wholesale and long-term deposits, debt and equity capital raised from primary market or private placements, as well as term borrowings from banks and other financial institutions, according to the RBI. 

CLSA analysts expect companies like SREI Infrastructure Finance, Power Finance Corporation, Rural Electrification Corporation, to apply for the WLTF licenses, Bloomberg reported.

The RBI paper pointed out that India’s 12th five-year plan projected the country’s infrastructure financing requirements at $1 trillion during 2012-17, with an estimated funding gap above 5,000 billion rupees. About 45 percent of that total came from government spending, with commercial banks providing 24 percent of the infrastructure spending as the second-largest source of finance. 

Indian Finance Minister Arun Jaitley said last June that the country was now requiring more than $1.5 trillion in investment for its infrastructure projects over the next 10 years. The proposal for new private infrastructure banks is part of the Indian government’s efforts to attract private capital to fund domestic infrastructure. 

In addition to setting up infrastructure banks, the government also established in 2015 the National Investment and Infrastructure Fund, a $6 billion sovereign vehicle dedicated to Indian infrastructure, and has been fundraising from international institutional investors, including sovereign wealth funds from Russia and the Gulf region. The UK and Indian government have agreed to create a joint fund under the NIIF, targeting green infrastructure in India.