for repo deals. Will the new norms revive the market ?
The recent credit policy announcements allowing repo transactions in all dated securities, and permitting reverse repo transactions to non-bank subsidiary general ledger (SGL) account holders, is expected to revive the repos market. Repo deals were banned by the Reserve Bank of India (RBI) after the scam in 1992, and resumed after that in only the new securities issued. Now, liquidity among all securities is expected to be good but speculation is on whether there will be any real demand for repos.
The widespread perception is that the actual volume of activity would depend on the rates prevailing in the inter-bank call money markets. With the evolution of a term money market, repos could also come in as a useful tool for collateralised lending. The reforms could initiate some amount of activity in reverse repo deals between non-bank and banks.
Demand for repos
Repo transactions are usually carried out when rates in the inter-bank call money markets are high. However, over the past few months, with there being ample liquidity within the banking system, rates in the call market have been hovering at easy levels.
Moreover, repo transactions were carried out largely on reporting Fridays when banks did not wish to borrow overnight money as it would add to their net demand and time liabilities (NDTL). Until the recent credit policy announcement, banks were required to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on their NDTL. However, from April 26 onwards, banks are not required to maintain this 10 per cent CRR and 25 per cent SLR requirement. S Vaidyanathan, assistant general manager, investment, at Bank of Baroda says: " Since these reserve requirements are being done away with, banks need no longer concern themselves about the concept of a low NDTL on a reporting Friday. This, in turn, has lowered the need for repos to a large extent."
U R Bhat, director and chief investment officer, Jardine Fleming, says: "Liquidity in the repos market where banks are participants will be influenced to a certain extent by the state of the call and term money markets. ''
The term money market
Does that mean that the benefits of one set of reforms will be offset by the impact of another? Most bankers do not think so. Despite repos no longer being the `man-Friday', there is a possibility that there will be an upsurge in demand once the term money market evolves, they point out.
As of now, there really is no term money market. But expectations are that soon the term money market will evolve as inter bank liabilities are no longer subject to SLR and CRR requirements. Once the term money market evolves it is expected that banks would prefer to do inter-bank lending and borrowing through repos. Repos would then act as a tool for collateralised inter-bank lending and would help the lender get some amount of security for the money lent out. Says Mohan Shenoi, vice president, resources and planning, ICICI Bank:" Repo transactions between banks will take place where there is danger of credit risk."
Long term repos
Currently, repo transactions are carried out for a minimum period of three days and usually for a maximum period of fourteen days. "However, there is no reason why repos should in the future not be carried out for longer than fourteen days, though it is less likely that the tenure would exceed a month. This is because the buyer and the lender are unlikely to come to a consensus on the repo rate for a period longer than one month," says Manoj Rane, chief dealer, funds and investments, IndusInd Bank.
SCRA Act amendment
When the term money market evolves, it is felt that there will be some amount of integration between the repo and the term money rates. This will mean that repo transactions would take place for longer than fourteen days. However, some foreign banks are currently not keen on undertaking repo transactions for longer than fourteen days. "The Securities Contract Regulation Act (SCRA) prohibits participants from undertaking a transaction for more than fourteen days. If we undertake a repos transaction for over fourteen days, will it be a legally enforceable contract?" asks a senior banker with a foreign bank. Repos and reverse repo transactions for over fourteen days are currently not legally enforceable contracts. It will need an amendment of the SCRA act in order to make these contracts legal. And how long such an amendment would take is anybodys guess. Needless to say, once this is allowed it will determine the volume of transactions to a large extent.
The non-bank SGL holder
The other difference that RBI has introduced is that reverse repo transactions will , now onwards, be allowed to non-bank entities holding SGL accounts. The first leg of the transaction by non-bank entities should be by way of purchase of securities eligible for repos from banks or primary dealers. The second leg will be by way of selling back securities to them. Uptil now, institutions were not allowed to deploy excess money into buying securities from banks and giving money to them, which in effect is a reverse repo transaction for a non-bank.
Firstly, banks would be rather keen on borrowing from non-bank SGL account holders under repos. This is because these borrowings would not be subject to CRR and SLR requirements as they are not treated as call money borrowing. As against this, any borrowing, between a bank and a non-bank in the overnight money markets is still subject to CRR and SLR requirements.
Secondly, non-bank entities would have a larger number of players to lend funds to. A K Sridhar, assistant general manager, UTI, says: "For institutions lending on an outright basis, certain exposure limits are set by the banks. However, lending under reverse repos will bring a larger number of banks into the arena as the institutions will have securities against which the borrowing is done.'' A larger number of co-operative banks and new banks are likely to receive funds from these institutions.
However, unlike UTI, the
question of liquidity will be a problem for some of the
institutions like NABARD. These entities also express doubts over whether they would go ahead with reverse repos transactions with banks. P C Misra, chief dealer, NABARD says that the apex bank would much rather deploy funds into certificates of deposit or the bills market where the returns are higher than in reverse repos transactions. "We are flush with funds only twice during the course of a year, and these funds are usually for refinance purposes" says Misra.
PSU bond repos
Most players feel that although there will be an upsurge in repo deals, a major revival will come about only when repos trading is permitted in PSU bonds. During the scam days some banks were trading in the allotment letters issued for PSU bonds since despatch of certificates after the primary issue and transfers following seondary market transactions took time. Now, it is believed that until and unless sufficient cheques and balances are not introduced it may be difficult to see repos in PSU bonds being permitted. "There are a large number of banks and corporates holding PSU bonds and one of the ways through which the market can be revived is by allowing repos in PSU bonds," sums up a senior banker.
HUDCO has recently come up with a bond, where the investor has been given an option to hold the balance in the form of an SGL account. Companies have now to take a decision for going ahead with dematerialisation of their bond certificates in case repos are to be allowed in PSU bonds.
Manoj Rane says that traditionally a number of banks were paranoid about participating in repos (even in cases where such transactions were permitted) after the scam. Public sector banks still need express permission from their boards for going ahead with repo transations. The fear has now been partially removed as the RBI credit policy clearly indicates that it is in favour of repos. It may be just a matter of time before repos are allowed in PSU bonds and corporates permitted to undertake such transactions. That is
when the markets could see an actual revival.