Banks await cues from the budget to assess fund raising needs and have sought the nod to float long-term infrastructure bonds with tax breaks, a plea unlikely to be met due to its fiscal cost, analysts said.
Finance Minister Pranab Mukherjee will present the budget on Feb 26.
Infrastructure projects require loans for 15-20 years, but banks do not have access to long-term funds. Most of bank deposits are for less than five years. Banks can raise five-year deposits eligible for tax deduction.
The debt capital raised by banks via tier II segment are leveraged to expand operations.
"All our resources (funds) are short term in nature. If we lend this for long term, there will be asset-liability mismatches," K. Ramakrishnan, chief executive of Indian Banks' Association, the apex industry body, told Reuters.
State-run banks would look at the timeline for government's re-capitalisation programme to assess fund raising needs, a banking analyst at a Mumbai-based brokerage firm said.
Banks seek to get a clear idea on growth sectors from budget and will frame fund-raising plans accordingly, the analyst said.
"They would be looking for indirect incentives that could help the economy grow and help boost demand for credit," said Amit N. Rane, senior research analyst at Angel Broking.
India, beset with power blackouts, crumbling roads and choked ports, has said it needs investments of $500 billion in infrastructure in the five years to 2012.
"Tax-free status would make the bonds attractive to subscribe to and help meet demand from banks to finance infrastructure," Ramakrishnan said.
"The fiscal cost for providing a tax break would make it a difficult wish for the finance minister to fulfill," said Rajagopal Ramanathan, banking analyst with Centrum Broking.
"That's all we have asked. It will help us fund infrastructure sector seeing good growth," said S. Raman, executive director at state-run Union Bank of India.
Indian bank loans rose 13.9 percent on year as of Jan. 15.
Banks had an annual growth rate of 30 percent till 2008 before demand for funds shrunk.
Corporate demand revival, primarily in infrastructure, is spurring loan growth with about 43 percent of the incremental lending coming from the infrastructure sector, analysts said.
Indian banks saw a modest-to-lower profits on year-on-year basis in the Oct-Dec quarter on slow loan growth and low treasury gains even as the sector expects credit demand to pick up in subsequent quarters, mainly from infrastructure sector.
Banks would also be keeping a watch on government borrowing plan in the federal budget as it would determine the quantum of funds for lending, Centrum's Ramanathan added.