This measure is meant to improve liquidity and depth in the foreign exchange market, and the limit will be revised from time to time based on experience, RBI added.
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As he steps down from the RBI Governor post, Raghuram Rajan takes bold decisions to encourage corporate bond markets and make funds more accessible to Indian banks.
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).
In a bid to encourage the overseas rupee bond market, the Reserve Bank of India (RBI) has allowed banks to raise capital through masala bonds in the overseas markets. The RBI said this “constrains their participation”.
Consultancy PwC India’s partner Munesh Khanna said the move is in response to long-pending demand from the market.
“In addition, the ability of banks to issue rupee bonds for tier 1 and 2 capital and for financing infra projects augurs well for the economy”, Khanna said.
The RBI further said it will review the entire guidelines including the ASCL limits after a year of the guidelines becoming fully implemented (during FY 2019-20). “This is meant to improve liquidity and depth in the foreign exchange market and the limit will be revised from time to time”.
“Additional provisions of 3 percentage points over and above the applicable provision on the incremental exposure of the banking system in excess of NPLL, which shall be distributed in proportion to each bank’s funded exposure to the specified borrower”, said the Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism. The measures come after a handful of distressed borrowers wiped out profits of several banks due to large loans going bad. “Once they get lowered over time, we would see a meaningful shift in borrowers to the capital market”, he said. Other measures include allowing foreign portfolio investors (FPI) to invest directly in corporate bonds, both in the OTC segment and on an electronic platform of a recognised stock exchange, and allowing FPIs to trade on NDS-OM. In the case of individual entities, the limit has been raised from 15% to 20%.
He added: “For a 50 per cent credit enhancement, which leads to a notch-up of a “BBB” or “A” category issuer to an “AA” or ‘AA+’ which is preferred by investors, at least three banks will have to participate in the bond issuance”.
Relaxation of tenor and counterparty restrictions in repo market in G-sec will also help in market liquidity, the bank said.
On letting banks issue masala bonds, he said this will lower borrowing costs over the medium to long term, but warned that given the lower ratings for these bonds, it may not be positive in the short term.
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A market making scheme in government securities by primary dealers has been worked out in consultation with the government which may help in increasing the liquidity of semi-liquid securities.
