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RBI policy seeks to to widen scope of investor participation

Reflecting a pragmatic outlook, the Reserve Bank of India's credit policy envisages changes with a view to deepen and widen the scope of investor participation in the foreign exchange and debt markets.

The central bank has allowed banks to borrow up to a maximum limit of 15 per cent of their unimpaired Tier I capital from overseas markets. The new policy decision is a change of tracks from a system of uniform ceiling on borrowings to one system where the ceiling is linked to the Tier I capital of the bank and aims to bring about greater integration between the domestic and foreign money markets.

The April 1997 slack-season credit policy had allowed banks to raise US $ 10 million from abroad.

The RBI has introduced auction of 28-day treasury bills to help banks augment cash management requirements of various segments of the economy. Presently, the apex bank auctions 14-day, 91- and 364-day treasury bills and dated government securities.

Money market mutual funds have been permitted to invest in rated corporate bonds and debentures with a residual maturity of one year. However, as a prudential measure, the RBI has retained the ceiling of three per cent of the total resources on investment in commercial paper issued by an individual company. The existing ceiling will now also include bonds and debentures.

Bank investment in overseas money markets will be subject to a ceiling of 15 per cent of the unimpaired Tier I capital. This limit will, however, exclude investment of nostro funds arising out of foreign currency non-resident (banks) deposits, EEFC, RFC and ESCROW accounts and overnight investments. The banks will continue to be governed by restrictions relating to gap limits.

Banks, whose overseas borrowings or investment limits under the revised system falls below the existing limits of $ 10 million, may obtain their board of directors's approval for enhancing the limit to $ 10 million. The approval will then be filed with RBI.

The apex bank has allowed non-resident Indians depositors to take forward cover for non-resident (external) rupee accounts and foreign currency non resident (banks) schemes. The RBI had recently allowed forward cover for foreign institutional investors investment in debt instruments.

The RBI has permitted all categories of FIIs with a ceiling of 30 per cent in debt instruments, to invest in government dated securities. This investment should be within the 30 per cent ceiling.

Banks have been granted freedom to stipulate margins on loans to individuals against preference shares, debentures and bonds of corporates. At present, such loans are subject to a minimum margin of 50 per cent.

Banks have been allowed to sanction 'bridge loans' to companies against expected equity flows and issues for a maximum period of one year. The apex bank, however, warned banks to exercise adequate caution and attention while disbursing such loans. As a prudential measure, the RBI has stipulated that such loans be given after approval from banks boards.

The total amount of sanctions under the bridge loans will have to be accommodated within the ceiling of five per cent of the incremental deposits prescribed for banks investments in shares.

As an attempt to develop the retail market for government securities, banks have been allowed to freely buy and sell such securities on an outright basis at prevailing market prices without any restrictions on the period between sale and purchase.

The RBI has decided to allow ready forward transactions for public sector enterprises bonds and corporate debt securities held in dematerialised form. Such transactions should take place in a recognised stock exchange. They will be initially allowed for those who are already operating ready forward transactions in government securities. The nature of participation in repos in PSU bonds/debentures will be similar to participation in government securities.

The minimum size of certificate of deposits to a single investor has been reduced from the existing Rs 1 million to Rs 500,000. Certificate of deposits above Rs 500,000 will be multiples of Rs 100,000.

On an experimental measure, the RBI will introduce uniform price auction method for the 91-day treasury bills auctions. The central bank hopes this will eliminate the "winners' curse" and broaden market participation.

The RBI will introduce the practice of notifying amounts for all auctions including 364-day and 14-day treasury bills.

The RBI has decided to keep non-competitive bids outside the purview of the notified amount. The discretion of whether to accept or reject non-competitive bids, partially or fully, will rest on the apex bank. At present, non-competitive bids for 91-day and 14-day treasury bills auction are accepted within the total notified amount from participants which include state governments, provident funds, and the Nepal Rashtra Bank.

The minimum size of operation for lenders in the call/notice money market has been reduced from Rs 100 million to Rs 50 million, provided such entities provide evidence to RBI of their bulk lendable resources. Such transactions should be routed via primary dealers.

RELATED REPORTS:
RBI cuts interest rates to boost growth
Policy will boost production, says governor
Finance minister hopes credit flow will increase
Business chambers hail policy

EXTERNAL LINK:
The Reserve Bank of India busy-season credit policy

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