Bankers demand for issue of Infrastructure Bonds.

The long-standing demand of banks that they be allowed to issue tax-free bonds to fund long-term infrastructure projects may not be accepted by the government and included in the Budget. The government has not found any reason to accept the demand, especially at a time when the state of its finances has gone awry.

“Everyone wants to raise money through tax-free bonds, but we need to see whether it is really required. The revenue department is already concerned about tax collections. The government needs to pay attention to fiscal implications of such a move,” said a finance ministry official.

Banks had reiterated the demand in their Budget wishlist, arguing that they were finding it hard to raise long-term resources for infrastructure projects. They had raised the issue at a recent meeting with R Gopalan, the new financial services secretary. They said they wanted to issue tax-free bonds and keep these out of cash reserve and statutory liquidity requirements.

“We have asked for tax-free bonds. Foreign funds are not interested in long-term investments. The government sees merit in the demand but is not agreeing because of revenue considerations,” a senior banker said on condition of anonymity.

In 2004, the Reserve Bank of India had allowed banks to issue infrastructure bonds with a maturity of five years and above. Bankers said they could not use the opportunity fully as there was no incentive for people to subscribe to such bonds in the absence of any tax benefits.

“For the infrastructure sector, you need long-term funds, and if the tenure is long, you need to give a higher rate… There is a market for tax-free bonds of about 7.8 per cent. At present, the rate on taxable bonds is about 8.5 per cent. So, the lending rate goes up accordingly,” said another banker.

The sector requires $500 billion (Rs 23 lakh crore) investments in the next five years. However, there is an asset-liability mismatch because infrastructure projects require loans for 15-20 years, whereas banks do not have access to such long-term funds. Most of their deposits are for less than five years.

In the past one year, the government has allowed Indian Railway Financial Corporation and India Infrastructure Finance Company to raise funds through tax-free bonds. IIFCL raised Rs 10,000 crore last year, but the funds have not been utilised yet. This is because banks are finding the rate of interest too high.