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Let banks issue tax-free bonds
July, 06th 2010

ICICI Bank has urged the Government to allow banks to issue tax-free infrastructure bonds. Tax-free bonds would prove to be a cost-effective source of funding for banks and enable them ramp up their infrastructure financing activities, ICICI Bank's Chief Executive Officer and Managing Director, Ms Chanda D. Kochhar, has said.

Also, priority sector classification for infrastructure financing would go a long way in making lot of funds available for infrastructure projects, Ms Kochhar told a conference on Public-private partnership (PPP) in State Highways' here on Monday.

Currently, infrastructure financing by banks are not covered under priority sector classification. Simply put, for every Rs 100 lent by a bank to an infrastructure project, the bank has to lend Rs 40 more to priority sector.

With nation's priority being infrastructure, this kind of funding should qualify as priority sector, she noted.

Presenting a sort of wishlist to enable more banking funds for infrastructure financing, Ms Kochhar also suggested that reduction of Statutory Liquidity Ratio and Cash Reserve Ratio requirements on these bonds will bring down the cost of funding for infrastructure projects.

Ms Kochhar also suggested that banks should be allowed to provide guarantees for external commercial borrowing loans. There are many of foreign lenders that do not want to take a direct risk on infra projects in India, she noted.

Banks have been consistently looking at infrastructure funding in a big way. Over the last decade, the total infrastructure funding by banks has gone up from $2 billion to $67 billion. All infrastructure financing is long-term. But the source of funding for the banks has been short-duration, leading to asset-liability mismatches.

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