Basel III norms may restrict banks from extending long-term infra loans: RBI report

Banks may face some constraints in extending long-term finance to infrastructure projects once the Basel III bank liquidity norms are implemented, according to the Reserve Bank of India.

In the absence of alternative arrangements (such as securitisation, take-out finance), banks may not be able to undertake long-term project financing, said the RBI in its 7{+t}{+h} Financial Stability Report.

Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It requires banks to source more and better quality capital and address and capture risks not adequately recognised previously.

There are two liquidity norms under Basel III — liquidity-coverage ratio (LCR) and net stable funding ratio (NSFR) — that banks have to adhere to.

LCR is aimed at ensuring that banks have enough high-quality liquid assets on hand to overcome short-term liquidity disruptions. Under NFSR, the available amount of stable funding should exceed the required amount of stable funding over a one-year period of extended stress.

The report said “it is interesting to note that elsewhere massive public works have been financed seamlessly by governments (for example, Japan and China) and not through bond markets.

“In India, banks predominantly provide for funding requirements and the debt market has catered mainly to the Government. Banks hold government bonds in their portfolio because of statutory requirement and also due to the sovereign status of bonds.”

Credit enhancement

The RBI said there are concerns over the provision of credit enhancements/guarantee by banks to corporate bond issuances.

Credit enhancements will hamper the development of a corporate bond market on corporates’ own financial strength and could possibly distort the pricing mechanism.

In addition, reliance on credit enhancements provided by banks will keep most of the risks in the banking system.

Countries such as China, Korea and Egypt attempted to develop corporate bonds markets by encouraging banks to offer bank guarantees, but couldn’t achieve much success.

ramkumar.k@thehindu.co.in

Source: thehindubusinessline