Ready-Forward Repo Ban Foxes Co-Operative Banks

Co-operative banks in Maharashtra are stumped by a recent directive from the registrar and commissioner of co-operatives (RCS) banning them from undertaking inter-bank ready-forward (repo) deals in dated government and approved/ trustee securities.

Senior co-operative bankers said the directive from the RCS was contrary to the Reserve Bank of India (RBI) instruction in this regard. The RBI has permitted co-operative banks to enter into repo and reverse repo transactions in securities (treasury bills, Central/ state government securities) approved by it.

A ready-forward contract, which is often used generically to cover reverse repos and repo-like deals, is a transaction carried out under an agreement in which one party sells securities to another and, at the same time and as a part of the same transaction, commits to repurchase an equivalent amount of securities on a specific date in future at a specific price.

 

Bankers said, at a time when the RBI was seeking to broaden and deepen the repo market as an alternative to the call money market, it is was incorrect to ban inter-bank ready forward deals.

Ready-forward was the only alternative left to the urban co-operative banks to meet their asset liability mismatches in the absence of any other form of support from the money market.

"Due to the RCS' directive, co-operative banks are being denied even legitimate repo facilities by the primary dealers and mainstream banks. This does not augur well for the urban co-operative banking sector," said a senior banker.

The primary dealers may deny the UCBs funding under the pretext of the RCS circular. Another RCS guideline that has not found favour with the sector is the one that states that co-operative banks should take advantage of non-competitive bidding facilities.

Bankers observed that this would be applicable only to very small co-operative banks, since there is a ceiling of Rs 1 crore per bank per bid in the case of non-competitive bidding and major players in the gilts market would not be able to take advantage of this facility.