LONG TERM BONDS BY BANKS – FINANCING OF INFRASTRUCTURE AND AFFORDABLE HOUSING

In order to address the problems faced by infrastructure sector and to give a boost to housing sector, Reserve Bank of India has come out with different fund raising and lending structure specific to these sectors.

Under this new set of norms of borrowing the funds from public and lending to specific sector, Reserve Bank has permitted banks to issue long-term bonds with a minimum maturity of seven years to raise resources for lending to (i) long term projects in infrastructure sub-sectors, and (ii) affordable housing.  The bonds should be plain vanilla bonds i.e. they should not have any call or put option. Further, the banks are not permitted bonds of each other i.e. banks should not have cross holding in such bonds.

What is Affordable Housing?

Affordable Housing is defined as housing loans eligible under priority sector lending i.e upto Rs.25.00lac in Metropolitan Cities with population above 10lacs and Rs.15.00lacs in other areas

Apart from Priority Sector Housing Loans as mentioned above, housing loans to individuals upto Rs. 50 lakhs for houses of values upto Rs. 65 lakhs located in the six metropolitan centres viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad and Rs. 40 lakhs for houses of values upto Rs. 50 lakhs in other Centres for purchase/construction of dwelling unit per family, will also be classified as Affordable housing units.

How it benefits Infra and housing sector:

CRR and SLR requirement:- The bonds so raised will be exempt from calculation of NDTL. The benefits accrue to the banks in the form that they will not have to keep CRR and SLR on the amount of bonds. Since the resources raised through these bonds are intended to utilized toward infrastructure and affordable housing finance, better costing can be achieved in view of non CRR and SLR requirements. The funds therefore can be made available on lower rate of interest to these sectors. (On normal fund borrowed by banks either in the shape of deposits or in the shape of borrowings, banks have to provide 4% CRR and 22% as SLR, which means that out of total Rs. 100 banks have to keep Rs.26 separately, as such cost of lending increases)

Q: Can loan given to individual for repair of dwelling units upto Rs.2.00lacs in Rural Areas and upto Rs.5.00 lakh in Urban and Metropolitan Areas be given under Financing of INfrastrucure and Affordable Housing Finance Scheme?

Ans:- Yes, since these houses are part of priority sector.

Q Can loans given to Housing Companies for further finance to individual upto the limit of Rs.10.00 lakh be included as finance under Financing of Infrastructure and Affordable Housing Finance Scheme?

Ans: Yes, since these form part of priority sector