InvestorQ : What does ICICI Bank plan to do with Rs10,000 crore of long term infrastructure bond raising?
Debbie Mascarenhas made post

What does ICICI Bank plan to do with Rs10,000 crore of long term infrastructure bond raising?

Arti Chavan answered.
4 weeks ago

ICICI Bank, which has been fast catching up with HDFC Bank on many of the spread and profitability ratios, is now planning to raise up to Rs10,000 crore via issue of infrastructure bonds. ICICI Bank will deploy these funds for project financing and also for giving loans for affordable housing projects in India. Infrastructure bond funds can be applied for projects classified as infrastructure projects by the government of India. Normally, ICICI Bank does see robust demand for its infrastructure bonds from HNIs and institutional investors.

What is so special about these infrastructure bonds for the issuing bank like ICICI Bank? Remember, that the RBI has specifically exempted these bonds from the maintenance of CRR and SLR requirements. That means; when the bank raises funds via such bonds, it is exempted from maintaining cash reserve ratio (CRR) and statutory liquidity ratio (SLR) against such liabilities. This exemption is important as it not only enhances the lendable amount but also plays a role in effectively reducing the cost of funds of the bank.

But the real value to the bank is not just about the CRR and SLR exemption. These infrastructure bonds have one more important role to play, due to their long term tenure. They mitigate asset-liability mismatch risks for the bank since long term allocations are now matched by long term funding sources rather than short term deposits. Like the noted economist, Pronab Sen, had underscored; the risk of maturity mismatch is quite high for most of the Indian banks and such long term fund raising can address that problem.

The infrastructure bonds of ICICI Bank have been assigned “AAA” rating by ICRA, which indicates highest safety on timely repayment of interest and principal. ICICI Bank has been very aggressive in mopping up funds via infrastructure bonds. Outstanding infrastructure bonds of ICICI Bank are up 75% in the last one year; surging from Rs22,139 crore to Rs38,809 crore as of June 2022. Banks have to first provide assistance and then issue bonds only against such projects already funded. It cannot raise in anticipation of such allocation.

Overall, the Indian banks have turned pretty aggressive in funding legitimate infrastructure sector in recent times and that has raised ALM questions. Total loans given by the banking system to the infrastructure sector rose by 11.1% yoy to Rs12.14 trillion as of July 2022. In terms of borrower mix, 55% of the loans are given to the power sector while another 25% of these loans are extended to the roads sector. Other infrastructure sectors account for the balance 20% of the infrastructure loan books of the Indian banking system overall.