RBI launches big bang reforms to rejuvenate corporate bond market

All of a sudden, the RBI has announced several path breaking measures to give life to the country’s corporate bond market. The central bank has announced several market reform measures for mobilizing and investing funds in the corporate debt market inviting active participations from institutions and individuals.

Major measures include permission to banks to issue the so called rupee denominated bonds or masala bonds overseas for financing infrastructure and affordable housing and to mobilize Additional Tier I and Tier II capital. So far, rupee denominated bonds were issued only by big infrastructure lenders like IFC, HDFC etc.  The new policy will help banks to mobilize funds for meet their Basel capital norms requirements besides helping the infrastructure sector.  

Secondly, banks can provide additional loans or Partial Credit Enhancement against corporate bonds issued up to 50% from the current 20%. This will allow corporate bond holders to get more loans against the investment they made in bonds.  

Another reform step is allowing market maker category brokers of the stock market to participate in the corporate repo market.

A corporate bond repo is the market where a permitted borrower like a company or a bank pledges corporate bonds with another company or bank to raise money. The pledger agrees to repurchase the bonds at a specified price after one day.

Since there are large number of such brokers, their liquidity needs, the step will encourage them to hold more bonds.

As a policy for future, the RBI has revealed that it is considering corporate bonds as collateral in its famous Liquidity Adjustment Facility. At present only eligible securities (government securities) mentioned under SLR are qualified as collateral to avail funds through LAF.

Another suggestion by the RBI is to make transactions in the corporate repo market under electronic trading. This will multiply participation as transaction will be quickened through electronic dealing. Most of the government/bank transactions are now under electronic trading platform under the Negotiated Dealing System (NDS).

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Tags : rbi reforms in financial markets