Banking regulator Reserve Bank of India (RBI) was working on introducing repurchase agreements (repo) in corporate bonds and credit derivatives, RBI Deputy Governor Usha Thorat said on Friday.
Speaking at a conclave of chief executive officers and chief financial officers in Hyderabad, she said RBI was preparing guidelines corporate bond repos that would be placed in public domain shortly. This will ensure adequate liquidity in the Indian infrastructure finance segment. At present, the repo facility is allowed only in government bonds.
On demand for banks providing guarantees for corporate bonds, Thorat said the experience of other countries was not encouraging and the current regulatory policies in India did not allow banks to guarantee corporate bonds. Such a product placed the entire risk on the banking system, distorted pricing of corporate bonds and discouraged institutional and retail investors from appraising and assuming credit risk, she said. The central bank has already decided the pre-conditions for allowing repos in corporate bonds, such as an efficient and safe settlement systems.
Credit derivatives, she said, would take a little more time in coming. RBI was conscious of the need to study the issue and form guidelines at the earliest, she added. “A policy for introduction of credit derivatives is being developed taking into account the lessons learnt from the global crisis,” she said.
The government had hinted the introduction of repos and derivatives in corporate debt to improve investments in the infrastructure segment in this year’s Economic Survey.
“Repo is a way of getting liquidity in corporate bonds,” Thorat said. On take-out financing, Thorat said the issues pertaining to capital requirements were already presented to the central bank. Take-out financing will help banks in asset liability management since financing infrastructure projects requires long-term resources.
May raise HTM cap
RBI Deputy Governor Usha Thorat today said the central bank was looking into a proposal from some banks to increase the ceiling on bonds parked in the held-to-maturity (HTM) category to escape the mark-to-market (MTM) accounting norm. “There have been references made to us and we are examining them. When we are examining, we will definitely come out with something,” she said.
At present, banks can hold government securities up to 25 per cent of net demand and time liabilities in the HTM segment. Owing to the large borrowing plan, budgeted at Rs 4,51,000 crore this year, banks are left with little room in the HTM segment, leaving them open to the risk of MTM losses on incremental purchases of securities.
When banks buy government bonds, they classify them into three categories - trading, available for sale (AFS) and HTM. If a security in the trading portfolio is not traded for 90 days, it has to be shifted to AFS. But RBI expects banks to shift securities from AFS to HTM, or vice versa, at the start of the year with prior permission of the bank’s board or its investment or asset-liability committees. With HTM limit virtually exhausted, anymore buying of bonds has to be classified as AFS, for which MTM provisions would be required. Fearing MTM losses, banks have become reluctant to put securities in this category since yields are projected to rise.
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