Indian bank stocks rose after the central bank allowed lenders to sell long-term bonds exempted from reserve requirements to boost funding for infrastructure and affordable housing.
The rupee-denominated bonds will have a minimum maturity of seven years and will be free from cash reserve and statutory liquidity ratio requirements, as well as so-called priority sector lending targets, the Reserve Bank of India said yesterday. The S&P BSE Bankex index, which tracks 12 bank stocks, was poised for its longest winning streak in two weeks.
“Exemptions on reserves give banks access to funds at comparatively cheaper rates,” M. Narendra, chairman and managing director of Chennai-based Indian Overseas Bank, said in a telephone interview yesterday. “We are planning to raise funds through this avenue to finance existing infrastructure loan book and to do incremental lending.”
Prime Minister Narendra Modi, in his first budget presented last week, pledged $25 billion to boost spending on developing the nation’s infrastructure, including highways, power plants, ports and housing. Loans for so-called priority housing rose 9 percent in the year to May 30 from a year earlier, compared with a 29 percent increase in home financing excluding priority lending, RBI statistics show.
The Bankex rose 0.9 percent as of 11:54 a.m. Mumbai time, poised for a third day of gains. State Bank of India, the nation’s largest lender, gained 1 percent, while ICICI Bank Ltd. (ICICIBC) climbed 2.8 percent. Indian Overseas, which isn’t part of the Bankex, lost 0.8 percent.
Modi and Finance Minister Arun Jaitley are making the improvement of India’s infrastructure a priority as they seek to boost the nation’s economic growth rate from near a 10-year low and curb inflation. They want to encourage private-sector funding of projects to allow for more than the government itself can finance.
The RBI defined affordable housing to include loans to individuals for as much as 5 million rupees ($83,000) to buy property in the nation’s six biggest cities, and 4 million rupees in other locations.
Under RBI rules, Indian banks must provide at least 40 percent of their loans to priority sectors including agriculture and small businesses. They also need to keep 4 percent of total deposits as cash reserves with the central bank, and 22.5 percent invested in mostly government bonds to meet the statutory liquidity ratio.
“The central bank’s move makes it easier for banks to finance infrastructure projects by addressing asset-liability mismatches,” Arindam Saha, a Kolkata-based analyst at Credit Analysis & Research Ltd., said by phone. “The cost of funds will fall as lenders are being allowed to raise these funds without setting aside reserves.”