New local currency bond rules are a positive for banks: Moody’s

Mumbai: The new regulations for issuing long-term local currency bonds by banks are likely to improve their competitive positioning vis-à-vis housing finance companies (HFCs) and infrastructure finance companies (IFCs), said Moody’s Investors Service. The reason being the banks’ lower cost of funding allows them to be much more competitive on pricing.

This is especially relevant for plain vanilla mortgages, where price competition is already intense, forcing housing finance companies to operate with thin margins. The banks with the greatest exposure to infrastructure and mortgage loans are ICICI Bank, Axis Bank and State Bank of India, and they would be the key beneficiaries of these norms.

Moody’s, in a report, said the Reserve Bank of India’s new regulations on issuing long-term local currency bonds are credit positive for banks because they encourage issue of longer-term debt by reducing its cost.

Under the new regulations, long-term bonds ( with a tenor of more than seven years) are exempt from cash and statutory reserve requirements as long as the bond proceeds are used to fund new long-term infrastructure projects and affordable housing.

Also, loans funded by this mechanism are exempt from the computation of adjusted net bank credit for the purpose of calculating priority-sector lending requirements.

“By exempting the bonds from cash and statutory reserve requirements, the central bank is effectively incentivizing banks to issue the bonds by reducing their costs.

“Although banks have been allowed to issue long-term domestic debt since 2004, issuance has been scant because it was not economical for them,” Srikanth Vadlamani, Vice-President - Senior Analyst, and Nick Caes, Associate Analyst, Moody’s, said in their report.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.