Allow banks to pledge corp bonds as collaterals with RBI:Panel

Banks can be allowed to pledge corporate bonds as collaterals for borrowing money from RBI under the liquidity adjustment facility, according to a high level panel.
Stating that such a provision is available in many countries, including the US, Australia and Japan, the panel said it is not "uncommon for central banks to take a lead with a view to developing the financial market".
The proposal has been made by the high level panel -- comprising representatives from Finance Ministry, RBI, Sebi, IRDAI and PFRDA -- which has also suggested various other measures to deepen the country's corporate bond market.

Currently, Reserve Bank of India takes only government securities as collateral for undertaking its LAF (Liquidity Adjustment Facility) operations.
"Acceptance of corporate bonds as collateral under central banks liquidity management framework may incentivise banks and PDs to invest in corporate bonds and thereby create demand for corporate bonds," the panel said.
However, the committee noted that it is desirable that such a step is taken after the market repos gain some traction on their own.

"Depending upon the development of the repo market in some form, Reserve Bank may explore the possibility of accepting corporate bonds as collateral subject to suitable risk management framework in terms of rating and haircut," it said.

Globally, Australia, Canada, Eurosystem, Japan, Mexico, Sweden, Switzerland, the UK and the US accept corporate bonds as collateral for their liquidity operation.
In this regard, the panel said that initially RBI could consider accepting corporate bonds for overnight LAF operations as risks related to rating downgrade and change in market price of the underlying collateral would be minimal.
"Based on experience gained, it may be extended for long term repos. The legal framework laid down in the RBI Act may be looked into and if required, necessary amendments may have to be carried out for enabling such operations involving corporate bonds," the report said.

The 'Report of the Working Group on Development of Corporate Bond Market in India' has been submitted to RBI Governor Raghuram Rajan in his capacity as Chairman of the FSDC (Financial Stability and Development Council) Sub Committee.