Capital augmentation for banks in future could be a challenge and this could constrain them from increasing their lending to infrastructure, cautioned a top Reserve Bank of India official.
According to H.R. Khan, Deputy Governor, "There are two factors limiting the ability of the banks (to lend to infrastructure sector). First, is in the context of Basel III guidelines for banks.
"The second constraint faced by banks is that of asset-liability mismatches (ALM) that limits the banks’ role in lending to infrastructure."
In the context of Basel III guidelines for the banks, the additional capital requirement is estimated at Rs 5 lakh crore for the banks, of which non-equity capital will be of the order of Rs 3.25 lakh crore while equity capital will be of the order of Rs 1.75 lakh crore, said the deputy governor in his speech at a FICCI seminar on corporate debt last week.
Pointing out that asset-liability mismatches limits banks role in lending to infrastructure, Khan said for banks it would be difficult to assume bulk of the project risk and capital costs indefinitely in infrastructure projects without a commensurate development of the corporate bond market.
"Therefore, the importance of long-term debt financing for infrastructure projects can hardly be overstated owing to the longer pay-back period, multiplicity of approvals required, delays due to complexities in the design, safety and environmental aspects, etc.
"It may, however, be noted that we may see large issues of bonds by the banks to augment capital requirements for Basel III. This, in turn, add to the volumes in the corporate bond market," said Khan.
He observed that the specific characteristics of infrastructure bonds like long duration and high coupon make these bonds attractive for insurance and pension companies who should step up their investments given the limitations on banks’ capacity.
Moreover, steps being contemplated by IRDA for insurance companies may provide necessary boost.