Banks allowed to invest in competitors' long term bonds

RBI in its First Bi-monthly Monetary Policy Statement, 2015-16 said banks will be allowed to invest in bonds issued by other banks to fund long-term infrastructure projects and affordable housing. RBI stated, "In July 2014, banks were allowed to issue long term bonds (LTBs), with exemptions from certain regulatory pre-emptions, for lending to (i) long-term projects in infrastructure sub-sectors, and (ii) affordable housing. However, cross-holding of such bonds amongst banks is currently not permitted. On a review, it has been decided to allow banks to invest in such bonds issued by other banks, subject to the following conditions:

i. Banks' investment in these bonds will not be treated as 'assets with the banking system in India' for the purpose of calculation of NDTL; and

ii. Any single bank's holding of bonds in a particular issue will be subject to certain limits in relation to the bond issue size. Its aggregate holding of such bonds will also be subject to certain limits in relation to its own assets.

iii. LTBs held for trading will reduce the bank's priority sector and liquidity benefits obtained from its own issuance of LTBs.

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