RBI’s Measures Towards Corporate Bonds

1

With the growing NPAs, apart from certain measures like Strategic Debt Restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), and asking banks to increase provision towards bad loans, RBI has also taken following steps to encourage big Corporates to raise money through the issuance of bonds and decrease their reliance on banks for borrowing money.

Increasing the Partial Credit Enhancement:

The central bank has now allowed banks to increase the Partial Credit Enhancement (PCE) they provide for corporate bonds to 50% from 20% now thus providing an additional source of assurance, that the bond issuer would honor the obligation towards the bond buyer.

Pros:

  • This will enhance the credit rating of the bonds issued by the corporates
  • Would help lower-rated companies to access the bond market as their bond ratings would be improved.
  • As the risks associated with the bonds will come down, the interest rates in the bond markets will be lowered and will in turn allow the corporates to raise money at cheaper rates

Accepting corporate bonds as collateral at LAF:

RBI also announced that it’ll be accepting corporate bonds as collateral at its Liquidity Adjustment Facility (LAF) operations.

Pros:

  • This will make corporate bonds more attractive to banks, as banks can use corporate bonds as security apart from the G-Secs to borrow from the RBI

Facilitate electronics trading:

RBI announced that it’ll facilitate direct trading of corporate bonds on an electronic platform compared to the present Over The Counter (OTC) market for Indian and foreign portfolio investors (FPIs).

Pros:

  • This will increase transparency in the bond market
  • This will allow easy access into the bond market for the foreign investors who usually bring in a lot of money and will in turn enhance liquidity

Permit brokers as market makers:

In addition to banks, primary dealers, insurance companies that are currently allowed as market makers, registered brokers will also be authorized as market makers for the corporate bonds

Pros:

  • This move will make corporate bonds easily accessible to the investors and thus boost turnover in the secondary market.

Encouraging Masala bonds:

RBI announced that banks can now raise capital through rupee-denominated overseas bonds, or masala bonds. Although HDFC Ltd. raised Rs.3000 Cr though this method others companies such as NTPC Ltd., and Adani Transmission have followed trend. Indian companies are allowed to raise a maximum of $750 million per year through masala bonds with a minimum maturity of 5 years

Pros:

  • Issuers carry less risk compared to the investors
  • Since these are rupee denominated, they will be shielded against the risk of foreign currency fluctuations.
  • They create a demand for rupee and would support towards the stability of the rupee

Sources:

http://www.livemint.com/Industry/yRrRCeike3Lp1j0HpTqNBJ/RBI-spurs-72-billion-local-company-bond-market-with-new-rul.html

http://www.livemint.com/Industry/ydBffZ1kltayUexG3N1ZbI/Raghuram-Rajans-last-hurrah-Changing-the-way-corporates-bo.html

http://economictimes.indiatimes.com/markets/bonds/rbi-unveils-big-bang-measures-to-develop-corporate-bond-market/articleshow/53861178.cms

http://www.investopedia.com/terms/c/creditenhancement.asp

http://www.livemint.com/Industry/yRrRCeike3Lp1j0HpTqNBJ/RBI-spurs-72-billion-local-company-bond-market-with-new-rul.html

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s