Reserve Bank of India draft rules to help firms meet Sebi debt norms

The Reserve Bank of India’s (RBI’s) realignment of investment norms for banks could finally nudge companies to raise a fourth of their debt through the corporate bond market, first announced in FY2019 Budget.

Subsequently, the Securi­ti­es Exchange Board of India (Sebi) had in July 2018, notified that companies with outstanding long-term borrowings of Rs 100 crore and a credit rating of ‘AA and above’ must source 25 per cent of their debt requ­irement from the bond market.

The RBI, later on, brought in rules for banks to make provisions against companies that do not follow this mandate, indirectly telling them to ensure that companies fall in line.  The low rate in the econo­my, and abundance of liquidity were allowing companies to do so, but as rates rise and liquidity gets removed from the system, companies in the AA rati­ng basket may find it difficult to comply as investors are cho­osy taking exposure of such papers.  Therefore, widening of the investor base was warranted. By proposing to allow corporate bonds in the held to maturity (HTM) basket, while removing the HTM limit, and the statutory liquidity ratio (SLR) in the HTM basket, banks can now buy more of these bonds.

Earlier, only government and state government securities, and certain securities by infrastructure companies were allowed in the HTM category. Also, banks were not allowed to keep more than 25 per cent of their total investments in this category.

“The proposal for removal of the 25 per cent limit for HTM is significant, as that component is largely without mark-to-market (MTM) implications and consequently banks’ P&L accounts will be less volatile,” said Joydeep Sen, consultant, fixed income, at Phillip Capital.

NEW GUIDELINES

• AA and above firms with Rs 100 crore loans must raise 25 per cent of debt through bonds 
• The rule was first announced in the Budget of FY 18-19, and subsequently notified by Sebi 
• Banks are proposed to hold such bonds under HTM, expanding the investor base
• Draft norms to help lower rates firms struggling to raise debt money

“Corporate bonds being eligible for HTM is another positive move, as it will give a fillip to the corporate bond market and the efforts to nudge corporates to raise resources through bonds, apart from bank funding,” Sen said.

As of January 14, the SLR book of the banks was 28.37 per cent of the total deposit books, against the statutory minim­um of 18 per cent. The share of investment was more than 30 per cent in the past few years as banks parked their deposits in government and other app­roved securities in the absence of healthy credit growth.

However, credit pick-up has improved in the system as the economy scales a laboured recovery. The year-on-year credit growth in the system as of January 14 was 9.2 per cent, whereas deposits rose 10.3 per cent. As the economy opens up more, firms will increase their capacity, and for that, they will need funds.

The RBI draft for banks’ investment norms, experts say, will help trigger that change and develop the corporate bond market. However, the proposals are in the draft stage, and the final version could still put some restrictions.

Apart from those crucial changes in limits, the draft gui­d­elines largely stayed the cou­r­se to its extant guidelines. It said apart from HTM, there will be other categories such as available for sale and fair value through profit and loss account (FVTPL). Within FVTPL, held for trading will be a sub-category. The FVTPL will be the residual category where all investments that do not qualify for inclusion in HTM or available for sale shall be categorised, such as securitisation receipts (SRs), mutual funds, alternate investment funds, equity shares, derivatives, etc.

The FVTPL is more or less what the banks already follow but in other forms. The FVTPL, although new in the Indian context, is part of the International Financial Reporting Standards (IFRS) 9 norms and the RBI is now aligning Indian standards with international ones.