Banks want CRR, SLR, priority sector exemption for sovereign green bonds

Suggest green masala bond to attract foreign investors

4 min read Last Updated : Jan 13 2023 | 9:30 AM IST

Banks have requested the Reserve Bank of India (RBI) to exempt them from maintaining cash reserve ratio (CRR), statutory liquidity ratio (SLR), and priority sector lending requirement for subscribing to soverign green bonds to be floated in January and February.

Such exemptions are also available for infrastructure bonds.

In line with Finance Minister Nirmala Sitharaman’s FY23 Budget announcement, the RBI last week said it will auction a total of Rs 16,000 crore of green bonds in two tranches on January 25 and February 9.

The request for such exemptions was part of the suggestions by the debt market participants to facilitate firm demand for sovereign green bonds.

Ways to create sustained appetite for these instruments among investors include potentially looking at rupee-denominated offshore green bonds, or ‘masala’ green bonds, as well as providing banks with certain incentives, such as increased weightage for liquidity coverage ratio, sources told Business Standard.

Banks and insurance companies are among the largest investors in government bonds.

At a broad level, analysts have also for the last few months been citing certain exemptions, such as those associated with infrastructure bonds, to green bonds, in order to ensure healthy demand for these securities.

Infrastructure bonds are exempt from regulatory requirements such as CRR, SLR, and priority sector lending.

Market participants and the RBI have been discussing steps to ensure appeal of green bonds as these securities typically are issued at a premium to other kinds of debt — meaning that the rate of interest offered to investors is lower than other debt instruments.

Globally, green bonds are issued at a premium as the instruments, by design, are meant to facilitate access to cheaper capital for environmentally-friendly projects.

The first auction of sovereign green bonds on January 25 worth a total of Rs 8,000 crore, including Rs 4,000 crore worth of a five-year paper, and Rs 4,000 crore worth of a 10-year paper may see firm demand from banks, bond dealers said.

“There seems to be a degree of enthusiasm from banks, particularly public sector lenders, for the first tranche of green bonds; the cutoffs could be close to where the current five-year and 10-year regular bonds are trading,” a bond dealer at a bank said. On Thursday, the 10-year benchmark government bond closed at 7.29 per cent yield, while the five-year one settled at 7.14 per cent yield.

While the first auction may see good demand, shoring up sustained demand for these instruments would require creating a conducive environment, with special emphasis on overseas investors, market participants said.

“The problem, which is unknown right now, is the demand considering the premium, or as it is called, the ‘greenium’ for green bonds. We don’t know who will pay that premium in India right now. There are dedicated funds, environmental funds, etc. but we don’t think any of them are operating in this country and at this short notice to register them as FPIs, I don’t think that is possible,” a source said.

“Maybe a masala bond can be considered, or dollar bond to directly access these funds which are sitting offshore, it will make it easier for them to invest. The socially conscious funds will get access through masala bonds to high yields. It also keeps the currency risk open,” the source said.

A masala bond refers to a rupee-denominated offshore bond. Given that Indian bonds offer higher yields than debt instruments in advanced economies and several emerging market economies, a masala bond could evince healthy interest from overseas investors.

Moreover, unlike a dollar-denominated bond, in the case of a rupee-denominated offshore bond, the borrower — in this case the government — does not run risks arising from interest rate fluctuations.