25% Cap On Bank Investment In Fis May Be Raised

The Reserve Bank of India (RBI) is considering relaxing investment norms for public sector and private sector banks so that they can take an exposure of more than 25 per cent of their net worth in financial institutions (FIs).

If implemented, the move could trigger off a considerable flow of funds from banks into FI bonds.

Financial Institutions led by the Industrial Development Bank of India, Industrial Finance Corporation of India and Export and Import Bank of India had requested the apex bank to waive the prudential norms for commercial banks.

The prudential norms currently state that a commercial bank cannot take an exposure of more than 25 per cent of its net worth in any corporate or financial institution.

 

Institutional sources pointed out that the cut in the Cash Reserve Ratio announced in the last credit policy had freed a large amount of cash for banks. Further, the failure of bank credit to rise as much as expected has left the banks flush with funds.

But when the FIs approached banks to invest in bond issues, some of the big public sector banks refused as they had already reached the 25 per cent exposure limit. Therefore, we met the apex bank to waive this norm for the banks, said the sources.

Central bank sources confirmed that some public sector banks had sought the RBIs permission to invest more than 25 per cent of their net worth in FIs. Some of the public sector banks have taken up the matter and we will take a decision on it, they added.

However, RBI officials disclosed that the waiver would only apply to investment in FI bond issues, with the current norms for investment in corporates continuing to apply. According to the prudential norms, commercial banks and FIs cannot take an exposure of more than 15 per cent of their net worth in any individual corporate, or more than 25 per cent in group companies.

A favourable decision by the Central bank would have a major impact on the market borrowing programme of FIs, which have been continuously entering the debt market.

Public sector and private banks and institutional investors like the Life Insurance Corporation of India, the General Insurance Corporation and the Unit Trust of India all invest heavily in FI bond issues.

In fact, banks are usually the main investors in private placement of debt and also tend to bail out any shortfall in retail debt issues by the FIs.