Infrastructure Bonds

Why in News?
Infrastructure bonds are gaining renewed attention as India accelerates spending on roads, railways, power, urban infrastructure and green projects. Public sector banks and financial institutions are increasingly using these bonds to mobilise long-term funds aligned with national development priorities.

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What are Infrastructure Bonds?

Infrastructure Bonds are long-term debt securities issued by governments, public sector banks, or specialised financial institutions to finance large infrastructure projects such as highways, airports, power plants, railways and water systems.

When investors buy these bonds, they are essentially lending money to the issuer. In return, they receive:

• Fixed interest (coupon) payments, and
• Repayment of principal at maturity.

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Maturity and Tenure of Infrastructure Bonds

• The Reserve Bank of India (RBI) permits banks to issue infrastructure bonds with a minimum maturity of 7 years.
• In practice, most infrastructure bonds have tenures of 10–15 years, and sometimes even longer.
• Public Sector Banks (PSBs) remain the dominant issuers due to regulatory incentives and their role in funding national infrastructure.

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Types of Infrastructure Bonds

1. Government Infrastructure Bonds
   • Issued by the Centre, States, or their agencies.
   • Examples: Bonds issued by NHAI or State Infrastructure Development Corporations.
2. Bank-Issued Infrastructure Bonds
   • Issued mainly by PSBs to raise long-term funds for infrastructure lending.
   • These bonds are often exempt from CRR and SLR, reducing funding costs for banks.
3. Institutional Infrastructure Bonds
   • Issued by specialised institutions such as IREDA, PFC, REC, IRFC, etc.
   • Target specific sectors like power, renewables, railways and transmission.
4. Green Infrastructure Bonds (Special Category)
   • Used to finance environmentally sustainable projects such as renewable energy, clean transport and climate-resilient infrastructure.

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Why Do Banks Issue Infrastructure Bonds?

• Better asset–liability matching: Infrastructure projects require funding for 10–20 years, while bank deposits are mostly short term.
• Regulatory advantages: CRR/SLR exemptions make these bonds cheaper than deposits.
• Support government infrastructure push: Enables banks to fund large projects without stressing deposit growth or exposure limits.
• Stronger balance sheets: Diversifies funding sources and deepens the corporate bond market.

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Benefits for Investors

• Stable returns: Fixed coupons provide predictable income, suitable for retirees, pension funds and insurers.
• Portfolio diversification: Adds relatively low-risk debt exposure, often backed by sovereign or PSU issuers.
• Nation-building role: Investors directly contribute to roads, railways, power and urban infrastructure.

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Risks Linked with Infra Bonds

• Interest rate risk: Rising rates reduce the attractiveness and market value of fixed-rate bonds.
• Liquidity risk: Long tenures and thin secondary markets can make early exit difficult.
• Credit risk: Higher for bonds issued by lower-rated or private entities.
• Inflation risk: Fixed returns may not keep pace with inflation over long periods.

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Infrastructure Bonds vs Infrastructure Investment Trusts (InvITs)

Aspect	Infrastructure Bonds	Infrastructure Investment Trusts (InvITs)
Nature	Debt instrument	Trust-based investment vehicle
Returns	Fixed interest income	Periodic market-linked distributions
Risk Level	Relatively low (PSU/government-backed)	Moderate; project-performance dependent
Tenure	Long-term (7–20+ years)	No fixed maturity
Capital Appreciation	Limited	Possible
Liquidity	Limited	Listed InvITs traded on exchanges
Tax Treatment	Interest taxable as per slab	Tax-efficient mix of interest, dividend, capital gains
Regulation	RBI & SEBI	SEBI (InvIT Regulations, 2014)
Suitable For	Risk-averse investors	Investors seeking higher returns with moderate risk

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Previous Year Question

Which one of the following is correct in respect of the above statements? 

Ans: d

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