The Reserve Bank of India has permitted all all-India term-lending and investment institutions to extend advances to companies against their commitment of subscription to privately placed non-convertible debentures (NCDs). Earlier, it had been stipulated that financial institutions should not extend advances to companies as bridge loans or interim finance in this manner.
RBI has, however, laid down that the advances by financial institutions to companies against their commitments to privately placed NCDs must follow the guidelines laid down by the apex bank with respect to such lending. The Reserve Bank has stipulated that financial institutions must not violate any of the overall exposure norms prescribed by the central bank with respect to a single borrower or a group of borrowers in the process of lending to companies against their subscription to privately-placed NCDs.
This was conveyed by the Reserve Bank to the chairmen of all-India term lending and investment institutions such as, the Industrial Credit & Investment Corporation of India, Industrial Development Bank of India and Industrial Investment Bank of India through a circular dated April 4, 1997. Financial companies and corporates have welcomed this initiative, pointing out that in the last couple of years such lending was not allowed by the apex bank. The Reserve Bank had stipulated in August 1995 that financial institutions would not be allowed to extend loans to companies against their own commitment of NCDs.
A financial institution official told Business Standard that the initiative would be beneficial to companies as it could enable them to obtain credit at lower rates, especially if the non-convertible debenture under consideration was tradeable on the bourses. For the financial institutions, this could be a welcome change. A senior FI officer pointed out that such advances could be treated as investments in NCDs by the financial institution, instead of, as credit extended.
