Moreover, the money raised by banks via these long-term bonds (7 year) for loans to infrastructure firms will be exempt from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements that other bank deposits are subject to. In addition, these bonds will also be exempt from meeting priority lending targets for banks.
Also, in terms of their historical books (infra loans that they have already given) 16 percent will be eligible for these exemptions starting this year. But who will buy these 7-year bonds?
In an interview to CNBC-TV18, SL Bansal, CMD of Oriental Bank of Commerce , said he sees large number of takers for infra loans. He feels the norms would provide lot of benefits for the priority sector lending and expects lot of stress to ease in the infra sector. He, however, does not see any immediate benefit for home loan borrowers.
Bansal said that developers could benefit from loans priced 75-100 bps lower. And feels banks can price loans properly due to refinancing option.
Arundhati Bhattacharya, CMD of State Bank of India , said the new norms will allow banks to match loans with the productive life of assets. She thinks the banks would now be able to price their risks better as flexible loan pricing will ease the stresses for infra financing.
Bhattacharya expects more depth and liquidity in the bond market going forward. She expects the cost of funds for banks to come down by 35-45 bps, though the "actual needs to be worked out properly".
She said the banks still need two quarters to see meaningful growth in credit offtake. She sees credit growth for infra investments to pick up in CY15.
Media reports suggest listing of SBI Life as an option to raise capital for the bank. Even Banking Secretary GS Sandhu said that consolidation of SBI subsidiaries is on the cards but will be gradual.
SBI Life Insurance is a 74:26 JV between SBI & BNP Paribas Cardiff. SBI Life values at Rs 20,000 crore and even a 25 percent dilution should result in Rs 4000-5000 crore.
Replying to news report, Bhattacharya said that even JV partner has to be on board for listing of SBI Life.
Below is the transcript of SL Bansal and Arundhati Bhattacharya's interview with Latha Venkatesh and Sonia Shenoy of CNBC-TV18.
Latha: Who will buy the seven year bonds; they are uninsured, unsecured? Indian savers are used to at the most five year fixed deposits (FDs) and they are used to tax free 10 year bonds, will there be a market for the seven year bonds?
Bansal: I think we will create market for that in any case. Public has a lot of faith in the banking industry and that is why are confident that we will be able to raise money in these type of bonds.
Latha: What is your sense, the cost might be? Would it be a spread over your current five year FD? Today if you have to issue a seven year approximately where do you think it will be priced?
Bansal: I think something like 50 basis points higher maybe around 9-9.5.
Latha: 50 bps higher than government of India paper or your FD?
Bansal: Our FD rate is 8.75 as on rate for five year and above. Government of India paper is something like 8.70-8.80, so, I believe at 9.25 or 9.5 something like that rate will be quite attractive for the public and they will be in a position to mobilise sufficient money and as the time progresses there will be large number of takers for this type of instruments.
Sonia: So if you can tell us about how much your cost of funds will fall not just overall but also how much it could fall both for housing as well as for infrastructure?
Bansal: See the guidelines are very clear, whatever money you are raising and lending to infrastructure, it will not be subject to cash reserve ratio (CRR) some 4 percent. Now suppose I am raising money let us say for calculation purpose at 9.5 then 4 percent of 9.5 translates to around 38 bps and then overall 22.5 percent SLR cost which is 22.5 percent.
Suppose I am earnings 8.70 percent on the bonds and my lending rates are close to 11.50 percent, the difference of that on 22.5 percent plus lot of benefit will be there on priority sector lending. See today environment involves lot of cost. I think lot of tweaking has been done in the priority sector definition in this session and the requirement of the priority sector lending and then accordingly agriculture lending will come down and the banks will be benefitted a lot.
Latha: Can you tell us what you see as advantages for your bank?
Bhattacharya: There are quite a bit of advantages in view of the fact that it is not only the amount of advances we do in infrastructure and the core industry projects and in the affordable housing space going forward, but also certain percentage of our portfolio as on yesterdays date, that also is available for us to raise these bonds.
Mr. Bansal was just now commenting on what would be the advantages for the banks and I subscribe to the same. First of all there is no CRR, SLR requirement. Secondly whatever you raise over there will not be treated as part of Adjusted Net Bank Credit (ANBC), the number on which we have to do our priority sector lending. So to that extent it will give us a little more comfort and we will be able to utilize the funds over there in a more profitable manner.
Having said that what it also does on the asset side is it at long last allows us to match the loan with the productive life of the asset instead of having to scrunch the repayment in a much smaller space of time.
As RBI has said in its circular that if you scrunch the repayment it results in stress, it results in higher use of fees. It doesn't allow the promoters to take out enough equity for the next project so that they start leveraging more. So all of these things will get rectified and not only that, I think with this we will also be able to price our risk better.
Why I am saying that is currently because the repayment requirements were so high, we were not really able to do much of a differential pricing for the project period that is the project implementation period and the subsequent period. But now when your requirement for repayment of the principle is not going to be so high, you will definitely be able to get a little higher interest for the project implementations period. So even risk pricing will become much better. So overall it is a very good thing.
If you look at our bond market, our bond market has not really attracted depositors or bond buyers. I hope with the banks becoming more active in the bond space, even more depth and liquidity in the bond market might come.
Latha: I had already asked Mr. Bansal that who will buy these seven year bonds. The Indian retail investor has not had this experience; it is still an unexplored market. For seven years, there is no early redemption, unsecured, uninsured – you see so much appetite?
Bhattacharya: It will happen over a period of time. I am not saying that it is going to happen tomorrow but I believe over a period time this will happen. The reason as I said, investors and savers want different types of instruments. The bond market has never been very liquid nor has it been very well understood. So, those were some of the challenges in the bond market.
However, Indian savers have a lot of faith on bankers. They have been putting all their deposits into banks and really speaking how many of them put it in because there is insurance? The insurance is also limited; it is not beyond a particular number. So, to that extent I don't believe that there will be no takers. I am sure that Indian investors will also like to have some kind of exposure in these sort of instruments.
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