The Reserve Bank of India (RBI) has ruled out Statutory Liquidity Ratio (SLR) status for corporate bonds, amid talk that the finance ministry is pushing the idea to free up funds from banks.
SLR refers to the minimum bond investments that banks must hold and is currently at 23 per cent of their net demand and time liabilities. Banks are allowed to borrow from the central bank through its repo window by pledging SLR securities.
“SLR is made for securities which are issued in market borrowing,” RBI Deputy Governor H R Khan said on Tuesday, on the sidelines of a conference. “The issue has been discussed, but I think nobody is serious to suggest that corporate bonds can be SLR.”
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Corporate bond markets, despite efforts, have been sluggish. The idea in granting these bonds an SLR status was to make it more attractive for investors and also banks. Bankers said at a time when the country was running a high fiscal deficit and had a high government borrowing programme, the time was not right for such a move. For, this would dampen the demand for government securities and increase costs for the government.
Media reports suggested the finance ministry had mooted the idea of including corporate bonds as part of a bank’s SLR and was in discussion with the central bank and the Ministry of Corporate Affairs. The move would have encouraged the corporate sector to raise funds through this instrument; there is a captive demand for SLR-status bonds, from banks.
While government bonds have SLR status, the central bank has been cautious in granting this to instruments issued by other institutions. It had, for instance, rejected a proposal by banks to convert Air India’s debt into SLR, saying there were no precedents for such a move, even though this was a state-owned company.
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Ajay Manglunia, senior vice-president, Edelweiss Securities, said RBI was clearly against giving SLR status to corporate bonds; it had, he recalled, rejected similar proposals from oil companies, though they were sovereign in nature. SLR securities, he said, were highly liquid and corporate bonds can’t be as liquid as government securities.
Companies raised Rs 166,396 crore from private placement of corporate bonds in April-August 2012, compared with Rs 96,012 crore in the same period last year, shows Securities and Exchange Board of India data. J Moses Harding, head of the asset-liability committee and economic and market research, IndusInd Bank, said, “The environment is not right currently for RBI to give SLR status to corporate bonds. When the fiscal deficit comes down to four per cent (of GDP), then RBI might think of doing so. If RBI gives SLR status to corporate bonds, there will be less demand for (government bond) auctions, pushing up the yield.”
The government had budgeted a fiscal deficit target of 5.1 per cent of GDP in this financial year but revised it last month to 5.3 per cent. It has planned to borrow Rs 5.7 lakh crore this year.
“Already, market borrowings are on the higher side and to cut the demand in government securities may not be right. Giving SLR status may not be good for the market in terms of yields and demand for the government bonds. It will also impact government borrowing cost. The issues there are higher fiscal deficit, higher market borrowings and yields and all these will get adversely affected if such a move is considered,” Harding said.