While the CRR is a tool where banks have to set aside liquidity with RBI in proportion of the deposits mobilised by them, the SLR requires banks to invest 25 per cent of their liabilities in government securities to generate instant liquidity.
In a meeting with RBI recently, banks were of the view that the exemption would help them to lend below 10 per cent to the infrastructure sector.
At a time when the credit growth is sluggish, the demand for credit is mainly coming from the infrastructure sector, especially power.
Companies, on the other hand, are unwilling to pay 13-14 per cent for availing of long-term infrastructure loans from banks since they can manage cheaper loans by swapping dollar funds into rupees.
Most of the companies have borrowed dollar funds through the external commercial borrowings (ECB) route.
These funds are getting swapped into rupees at a cost of 7.75-8 per cent with a complete hedge (covering the foreign exchange risk). Indian banks cannot match the interest rates since they have raised funds above 10.75-11 per cent through tier-II bonds and other hybrid structures.
According to bankers, the interest rates could only be matched if these loans were exempt from CRR and SLR.
The RBI, in consultation with the government, has set up a committee to look into various aspects of infrastructure financing, including bank loans.
The committee will have to look into different ways of inviting bank finance for a longer tenure since the government is in the process of gradually withdrawing the tax-free status to various bonds and deposit schemes.
Development finance institutions (DFIs) used to raise funds through such tax-free bonds to finance infrastructure projects earlier.
Meanwhile, the 2007-08 Budget has proposed using foreign exchange reserves for financing infrastructure.
According to the proposal, the government will float a subsidiary under a two-tier structure to manage foreign exchange funds to get higher returns than what the RBI is currently earning. A part of such funds will then be lent to infrastructure projects.
The modalities are yet to be worked out, especially over managing the foreign exchange risk involved with such funds.