Explanation (I) to section 45IB of the Reserve Bank of India Act, 1934 defines "approved securities" to mean securities of Central and State Governments and such bonds, both the principal whereof and the interest whereon have been fully and unconditionally guaranteed by any such Government.
It was found that some unscrupulous NBFCs used to pledge such approved securities and raised additional finance against them. This defeated the purpose of protecting the interest of depositors by keeping specified percentage of deposit in the form of safe unencumbered securities. To rein such a malpractice, RBI made it necessary that such securities must be entrusted to a scheduled commercial bank designated by the NBFC for this purpose.
Only in emergent situations can the NBFC now withdraw the securities entrusted to the bank. It can withdraw them for repaying deposit. It can also withdraw them in the event of there being a reduction in the liability of public deposit, duly certified by its statutory auditors. It is permissible to replace the existing security by any of the approved securities of the matching value.
Such approved securities incl-ude the following securities also:
nThe 7-Years National Savings Certificates (VIII Series). Earlier NSC II Series was an approved security, but it has now been withdrawn by the postal authorities. At present, only VIII Series NSCs are issued by the postal authorities. They can be held in the name of companies too.
nShares of Regional Rural Banks, provided they are fully and unconditionally guaranteed by the concerned State Government.
n The 91-day and 364-day treasury bills.
nGovernment of India dated securities.
It may be noted that Unit '64 and current unsecured IDBI Flexibonds 3 issue are not approved securities.
One should always keep in mind that this list of approved securities is not static and most of them keep undergoing changes. There may be an addition and deletion as well.
It is a common feature that the amount of deposit outstanding as on a given date fluctuates on day-to-day basis. Accordingly, the amount of SLR requirement also fluctuates. If the amount of deposit outstanding at the end of a particular quarter goes down in comparison to the amount of deposit outstanding at the end of the immediately preceding quarter, the NBFC should be in a position to liquidate the excess investment and reduce the avoidable blocking of the funds.
In such a situation, one may find the investment in 91-day T-Bills an automatic choice, although at the cost of return to some extent. These T-Bills can be held for 91 days, i.e , till maturity as the tenor thereof coincides with the period (one quarter) for which the company is required to hold them to meet the SLR requirement. The company can get it redeemed on maturity without going to the secondary market for liquidation. It may however be noted that almost all the securities are highly liquid. These can be bought/sold in the secondary market through any one, athough may be at some extra price.
The author is a practicing chartered accountant in Mumbai
