Infrastructure Bonds

• 27 Dec 2025

For Prelims: Infrastructure Bonds, Types of Infrastructure Bonds, Infrastructure Bonds different from InvITs

For Mains: Role in infra financing; reducing ALM mismatch; deepening bond market; investor benefits and risks

Source: IE 

Why in News? 

State-run Bank of India (BoI) has raised ₹10,000 crore through infrastructure bonds, witnessing strong investor demand as bids worth over ₹15,300 crore were received against a base issue size of ₹5,000 crore.

Summary 

• Infrastructure bonds are long-term debt securities issued by governments, public sector banks, or financial institutions to fund large infrastructure projects.  
• They offer fixed interest payments and help banks manage long-term funding needs while supporting national development.  
• While these bonds provide stable returns and portfolio diversification, they also carry risks like interest rate, liquidity, and inflation risks.  
• Compared to Infrastructure Investment Trusts (InvITs), infrastructure bonds are debt instruments with fixed returns, whereas InvITs offer market-linked returns and are more liquid. 

What are Infrastructure Bonds? 

• Infrastructure Bonds are long-term debt securities — a way for governments or companies to borrow money from investors to fund large infrastructure projects (like roads, airports, power plants, railways, water systems, etc.).  
• When someone invests in these bonds, they’re essentially lending money to the issuer and in return receive fixed interest (coupon) payments and your principal back at maturity. 
• Maturity/Tenure 
  • (RBI) permits banks to issue infrastructure bonds with a minimum maturity of seven years, with typical terms often extending to 10-15 years. 
• Public Sector Banks (PSBs) remain the dominant issuers of infrastructure bonds due to regulatory incentives. 

What are the Different Types of Infrastructure Bonds? 

• Government Infrastructure Bonds: Issued by the Central or State Governments or their agencies to finance public infrastructure projects. Example: bonds issued by NHAI or state infrastructure development corporations. 
• Bank-Issued Infrastructure Bonds: Issued by banks (mainly Public Sector Banks) to raise long-term funds for infrastructure lending. These bonds are exempt from SLR and CRR, making them attractive for banks. 
• Institutional Infrastructure Bonds: Issued by financial institutions such as IREDA, PFC, REC, IRFC, etc., specifically created to finance infrastructure sectors. 
• Special Category 
  • Green Infrastructure Bonds:Issued to fund environmentally sustainable projects such as renewable energy, clean transport, and climate-resilient infrastructure. 

Why Do Banks Issue Infrastructure Bonds? 

• Better match for long-term infra loans: Infra projects need 10–20 year funds, while bank deposits are mostly short term. Long-term infra bonds give banks stable, long-duration money and reduce asset–liability mismatch. 
• Regulatory benefits lower cost:  RBI allows such bonds with CRR/SLR exemptions (subject to conditions), so they are cheaper than deposits since less money is locked in non-earning reserves. 
• Supports government infra push:  Infra bonds help banks fund large pipelines in roads, housing, and urban projects without stressing deposit-based funding or crossing exposure limits. 
• Strengthens bank balance sheets and markets: They diversify funding beyond deposits and increase bank participation in the bond market, aiding development of the long-term debt market. 

How do they benefit investors? 

• Stable Returns: Fixed coupons mean relatively predictable income, which appeals to conservative and long-term investors such as retirees, pension funds, and insurers. 
• Diversification: As debt instruments often backed by sovereign or quasi-sovereign entities, they can help diversify a portfolio away from pure equities and reduce overall volatility. 
• Nation-building Angle: Investors effectively participate in financing roads, rail, power, and other critical assets, aligning personal investments with national development objectives.

What are the Risks Associated with Infra Bonds? 

• Interest rate risk: Rising market interest rates can reduce the attractiveness of fixed-rate infra bonds. 
• Liquidity risk: Long tenures and limited secondary market trading may make early exit difficult. 
• Credit risk: Bonds issued by lower-rated or private entities may face higher default risk. 
• Inflation risk: Fixed returns may not keep pace with high inflation over long periods. 

How are Infrastructure Bonds different from InvITs? 

Aspect	Infrastructure Bonds	Infrastructure Investment Trusts (InvITs)
Nature	Debt instrument (loan given to issuer)	Trust-based investment vehicle
Returns	Fixed interest (coupon) income	Periodic cash distributions (interest + dividends)
Risk Level	Relatively low (especially PSU/government-backed)	Moderate; depends on project performance
Tenure	Long-term (7–20+ years)	No fixed maturity (market-linked)
Capital Appreciation	Limited	Possible, along with income
Liquidity	Limited secondary market liquidity	Listed InvITs traded on stock exchanges
Tax Treatment	Interest is taxable as per slab	Tax-efficient components (interest, dividend, capital gains taxed differently)
Regulation	RBI (for banking norms) and SEBI (for listing/disclosure)	SEBI (InvIT Regulations, 2014)
Suitable For	Risk-averse investors seeking stable income	Investors seeking higher returns with moderate risk

FAQs

1. What are infrastructure bonds?
They are long-term bonds issued to fund projects like roads, railways, airports, and power. Investors get fixed interest payments and the principal at maturity.

2. Why do banks issue infrastructure bonds?
They help banks fund long-term infrastructure loans using long-term money. This reduces asset–liability mismatch and also gives some regulatory benefits.

3. How do these bonds benefit investors?
They offer relatively stable and predictable interest income. They also add diversification and exposure to government or PSU-backed issuers.

4. What risks are involved in infrastructure bonds?
Rising interest rates can reduce bond value and selling early may be difficult. There is also default risk and inflation can erode real returns.

5. How are infrastructure bonds different from InvITs?
Infrastructure bonds are debt with fixed returns and limited capital gain. InvITs are market-linked investments with higher liquidity and fluctuating returns.

UPSC Previous Year Questions (PYQs) 

Q. Consider the following statements:

Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable. 

Statement-II: InviTs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'. 

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

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1 

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-1 

(c) Statement-1 is correct but Statement-II is incorrect 

(d) Statement-I is incorrect Statement-II is correct 

Ans: d