RBI will allow banks to unlock their corporate bonds for cash

To ease the liquidity crunch, the Reserve Bank of India and the Finance Ministry will soon allow banks to avail of a refinance facility...

To ease the liquidity crunch, the Reserve Bank of India and the Finance Ministry will soon allow banks to avail of a refinance facility by depositing their corporate bond holdings as collateral.

The proposal, pushed by some state-owned and private sector banks, was discussed recently by the government and the RBI. A favourable view has been taken, a government official told The Indian Express.

As on March 31, 2008, total bank investment in corporate bonds is estimated to be about Rs 80,000 crore. State-owned and private sector companies issue interest-bearing bonds to raise funds and these are subscribed by banks, mutual funds, insurance companies, NBFCs, etc.

While in most developed economies, these are actively traded in the secondary market, in India, the market for bonds has not developed rendering them illiquid.

A bank chairman who recently met officials in the finance ministry and the RBI said the basic problem was of liquidity. “Corporate bonds sit idle on bank balance sheets. Mostly, companies hold them till maturity. And the secondary market for corporate paper has no depth. It is virtually absent,” he said. Indeed, daily trading in corporate paper is just about Rs 200 crore.

“To begin with, the RBI will accept AAA-rated bonds of public sector undertakings (PSUs) as collateral in the repurchase operations through its liquidity adjustment facility,” said the official.

Since these are exceptional circumstances, and given the demand for bank credit, the RBI has, in principle, agreed to widen the ambit of its repo operations by accepting high quality corporate paper as collateral.

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Essentially, what this will do is create a market for corporate bonds, which otherwise are illiquid. The rate at which the RBI lends to banks with such bonds as collateral could be a tad higher than the repo rate of 7.5 per cent now.

P Vaidyanathan Iyer

P. Vaidyanathan Iyer is The Indian Express’s Managing Editor, and leads the newspaper’s reporting across the country. He writes on India’s political economy, and works closely with reporters exploring investigation in subjects where business and politics intersect. He was earlier the Resident Editor in Mumbai driving Maharashtra’s political and government coverage. He joined the newspaper in April 2008 as its National Business Editor in Delhi, reporting and leading the economy and policy coverage. He has won several accolades including the Ramnath Goenka Excellence in Journalism Award twice, the KC Kulish Award of Merit, and the Prem Bhatia Award for Political Reporting and Analysis. A member of the Pulitzer-winning International Consortium of Investigative Journalists (ICIJ), Vaidyanathan worked on several projects investigating offshore tax havens. He co-authored Panama Papers: The Untold India Story of the Trailblazing Offshore Investigation, published by Penguin. ... Read More