RBI breather for banks, MFs on unlisted bonds

The Reserve Bank of India (RBI) gave banks a one-year breather to regularise their investments in debt schemes of mutual funds.

The RBI said investments by banks in the debt schemes of mutual funds would continue to be outside the purview of non-statutory liquidity ratio (SLR) investments till December 2004.

Till now, banks' investments in the debt schemes of mutual funds were not categorised as SLR or non-SLR. What this means is that banks can continue to invest in mutual funds even if funds are investing in unlisted securities.

Mutual funds, in turn, will have to slowly phase out investments in unlisted debt instruments.

Mutual funds had feared they would face redemption pressure from banks if they had been covered by the 10 per cent cap requirement. Banks can invest only 10 per cent of their outstanding non-SLR portfolio in unlisted bonds.

The RBI said with effect from January 1, 2005, "only investment in units of such mutual fund schemes which have an exposure to unlisted securities of less than 10 per cent of their corpus will be treated on a par with listed securities".

Suresh Soni, head of fixed income at Deutsche Bank Mutual Fund said enough time had been given to mutual funds to phase out their investments in unlisted debt instruments.

He pointed out that companies had already started listing their debt issues. There would be no immediate redemption pressure on funds. Incidentally banks' investments in mutual funds are pegged at around 10 to 15 per cent of the total assets under the management of funds.

The RBI's circular essentially means that banks have just one more year to adjust their holdings in debt funds.

Correspondingly, the mutual fund industry has till January 1, 2005, to reduce its exposure to unlisted debt paper if they wish to have banks as investors.

One outcome of all this is that the bond market should see a small rally.The RBI also opened the gates for companies to issue unlisted debt paper, but again set a time limit of one year for the revised dispensation.

However, the RBI also put a cap on bank's investments in such freshly issued paper at 10 per cent of the increase in investment in corporate debt paper outstanding as on November 30, 2003.

According to the RBI clarification issued today, "Banks may also invest in unlisted securities issued after November 30, 2003 up to 10 per cent of the incremental non-SLR investments over the outstanding non-SLR investments as on November 0, 2003, up to December 31, 2004."

But the Securities and Exchange Board of India (Sebi) has given corporates till March 2004 to list all their debt paper.

Meanwhile, banks have also been allowed to invest in unlisted securities until March 31, 2004.

With effect from April 1, 2004, banks may also invest in unlisted securities until December 31, 2004, provided the issuers have applied to the stock exchanges for listing and the security is rated minimum investment grade.

The RBI has also clarified that security receipts issued by securitisation companies or reconstruction companies will not be reckoned as unlisted non-SLR securities for computing compliance with prudential norms.

Investment in asset-backed securities and mortgage backed securities will also fall under this exemption.