Bank credit to infra projects may suffer under Basel III

A recent report by ratings agency Icra said bank credit to infrastructure sector may be affected by the norms of the Basel- III regulation.

Credit to infrastructure is long-term in nature, while the deposits of banks is short-term to medium-term. This raises asset-liability mismatch.

According to the Basel-III norms, banks must maintain a strict net stable funding ratio (NSFR), which is designed to ensure that long-term assets are funded with stable liabilities.

Currently, the NSFR for Indian banks is 83 per cent and in order to increase it to 100 per cent, banks must reduce their exposure to long-term projects (viz infrastructure projects), the report shows.

Banks need to expand the long-term liabilities by Rs 8 lakh crore or shrink the assets to the same extent to make this ratio 100 per cent, the report shows.

Though the NSFR norm are likely to be implemented in India only by March 2018, banks would be constrained to fund the long-term assets through expensive capital instruments, which are likely to get more expensive as compared to Basel-II instruments due to higher loss absorption features, Icra said. This improves growth prospects of infrastructure finance companies (IFCs).