In probably last big-bang reforms by outgoing governor Raghuram Rajan, RBI will allow banks to pledge their corporate bonds, allow banks to raise masala bonds
To deepen the corporate bond market and encourage quality investors into the market, the Reserve Bank of India (RBI) will allow banks to pledge their corporate bonds to tide over temporary liquidity shortfalls, allow banks to raise rupee-denominated masala bonds to fund infrastructure projects.
Until now, only government bonds could be pledged to borrow money from the RBI and masala bonds were restricted to companies, non-banking finance companies (NBFCs) and housing finance companies (HFCs). Corporate bond reforms may be the last of the reforms from the RBI which will have the imprint of governor Raghuram Rajan, who would step down next month. Now on, brokers authorised by banks will be allowed to participate in the corporate bond market helping them meet their funding requirement. Foreign portfolio investors will also be allowed to undertake direct trading in corporate bonds without intermediaries like the brokers.
"These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication," a RBI release said. Banks will also be permitted to issue rupee-denominated bonds (masala bonds) overseas to meet their capital requirements, infrastructure financing and also for affordable financing. At present, these bonds were allowed only for companies and HFCs and NBFCs. HDFC was the most recent issuer of masala bonds, besides NTPC. Indian companies can access the overseas credit markets with investors into these bonds holding the currency risk.
This measure is aim ed at de-risking the bank balance-sheets by getting foreign investors. So far, banks led by State Bank of India (SBI) were the largest infrastructure financiers in the country. Since bank deposits are only for 10 years and these assets or infrastructure loans for longer periods such as 15 to 20 years there are fears of asset-liability mismatches that could jeopardise the banking system. The RBI has also expanded the partial credit enhancement (PCE) provided by banks to give an impetus to the corporate bonds market.
"The aggregate PCE that may be provided by the financial system for a given bond issue will be increased from the present 20% to 50% of the bond issue size subject to the PCE provided by any single bank not exceeding 20% of the bond issue size and the extant exposure limits," the RBI said. Karthik Srinivasan, senior vice-president & co-head, financial sector ratings, Icra Ltd, said, "The permission to banks to raise masala bonds can develop the overseas market for rupee-denominated bonds, the access to the repo widow for the debt brokers coupled with the access to trade directly on G-Secs and corporate bonds for FPIs should improve the liquidity in the domestic markets."
Even the retail participation in the bond market (both in the primary and secondary) will be lifted with the RBI planning to remove the remaining restrictions on seamless transfer of government securities between depositories and the RBI. "This should promote retail participation in the market by facilitating participation by small investors in primary as well as secondary markets," said the central bank.
manju.ab@dnaindia.net
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