The Reserve Bank of India has told banks to put ‘conservative limits’ on their investments in zero coupon bonds, including those by non-bank finance companies (NBFCs).
Banks should invest in zero coupon bonds only if the issuer builds up a sinking fund for the accrued interests and invests in liquid investments or securities such as government bonds, RBI said.
Investments in zero coupon bonds, if made on a large scale, could pose systemic risks since the credit risk on such bonds could go unrecognised until the maturity of the bonds, the central bank said.
Under zero coupon bonds, the issuer is not required to pay instalments or interests until the maturity. The risk could be significantly higher especially for long-term zero coupon bonds, RBI said on its website.
“It’s not such a bad idea and this is in line with the corporate debenture redemption fund,” said M. Sarraf, treasurer, with Dhanlaxmi Bank. “This instrument has not been used very frequently by companies as it is much more sensitive to interest rate fluctuations.”
The central bank, however, did not provide details of the amount banks may invest in zero coupon bonds.