Mumbai, July 15: To encourage infrastructure development, the RBI today exempted long-term bonds from mandatory regulatory norms such as CRR and SLR if the money raised is used for funding core projects.

“Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to long-term projects in infrastructure sub-sectors,” the Reserve Bank said.

Finance minister Arun Jaitley had said in his budget speech that “banks will be encouraged to extend long-term loans to infrastructure with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure”.

Under the 5/25 structure, banks may fix longer amortisation period for loans to projects in infrastructure and core industries sectors, say 25 years, with periodic refinancing, say every five years.

The RBI has issued instructions to banks specifying operational guidelines and incentives in the form of flexibility in loan structuring and refinancing.

Under the new norms, banks will not have to maintain the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for long-term infrastructure bonds. Funds raised through this route will also not be subject to priority sector lending requirements.

CRR is that portion of deposits or resources (raised by banks) which must be maintained with the RBI, while SLR is that proportion of deposits which must be compulsorily invested in bonds. According to the priority sector obligations, banks have to earmark a portion of their credit to certain pre-determined sectors.

The RBI made these changes to ensure credit flow to the infrastructure sector and encourage the issuance of long-term bonds to fund infrastructure projects that have high gestation periods.

As part of the relaxed rules, the RBI said the minimum maturity period of the long-term bonds shall be seven years and that these bonds will have to be denominated in rupees only. Yet another condition is that the bonds should be issued in plain vanilla form without call or put option.

“The relaxation of not maintaining CRR, SLR or priority sector requirements will ease the cost of funds for us and it will also lead to interest rate relief for the borrower as banks will be in a position to pass on the lower costs,’’ a senior banker said.

In yet another major relaxation, the RBI allowed project loans to be amortised (periodic payments of principal and interest) over a period of even 25 years. Banks had urged the RBI that the repayment tenor of these project should be in line with the period when cash flows are generated by the asset.

Banks had complained to the RBI that they were unable to provide such long tenor financing owing to asset-liability mismatch issues. To overcome the asset liability mismatch, they were forced to restrict their finance to a maximum period of 12-15 years.

Moreover, after factoring in the initial construction period and repayment moratorium, the repayment of the bank loan was compressed to a shorter period of 10-12 years (with resultant higher loan instalments), thereby straining the viability of the project.

An asset-liability mismatch occurs when a major portion of banks liability (deposits) is of a shorter tenure but the assets (loans) are of a longer tenure.

Apart from allowing banks to fix longer amortisation period for loans to projects in infrastructure and core industries sectors for as high as 25 years, RBI also allowed periodic refinancing of such loans. A major relaxation for banks here is that the RBI has clarified that such refinancing will not be treated as restructuring that invites higher provisioning.