RBI lets banks issue masala bonds, to accept corp bonds in LAF

Mumbai, Aug 25 (PTI) Reserve Bank today announced a slewof changes in fixed income and currency markets such asallowing lenders to issue ‘masala bonds’ and to acceptcorporate bonds under the liquidity adjustment facility (LAF). "These measures are intended to further deepen marketdevelopment, enhance participation, facilitate greater marketliquidity and improve communication," an RBI release said. To encourage overseas rupee bonds market, banks are beingpermitted to issue rupee-denominated bonds overseas (masalabonds) for their capital requirements and for financinginfrastructure and affordable housing. Currently, masala bonds can be issued only by corporatesand non-banking lenders like, HFCs and large NBFCs. Masalabonds are instruments through which Indian entities can raisefunds by accessing overseas capital markets, while the bondInvestors hold the currency risk. These will constitute for additional tier-I and tier-IIcapital for the lenders, it said, adding such overseas bondscan also be issued to finance infrastructure and affordablehousing under a current dispensation which applies for foreigncurrency bond raising. It can be noted that so far two Indian corporates — HDFCand NTPC — have made use of this facility to raise over Rs5,000 crore, but the segment was not open to banks. The RBI will be seeking amendments to enable the centralbank to accept corporate bonds under the LAF which is used tobridge temporary liquidity issues by lenders, it said. Outgoing Governor Raghuram Rajan had earlier said RBIwould be announcing a series of measures aimed at bonds andcurrency markets by end of the month. Rajan, whose tenure endson September 4, is likely to handover charge to Governordesignate Urjit Patel on September 6. Stating the absence of an overarching ceiling on totalborrowing by a corporate entity from the banking system hasresulted in banks collectively having very high exposures tosome of the large corporates, the RBI will be coming out withdraft guidelines on the ‘large exposure framework’, it said. To give an impetus to the corporate bonds market, RBI hasalso decided to expand limit of partial credit enhancement(PCE) provided by banks. "The aggregate PCE that may be provided by the financialsystem for a given bond issue will be increased from thepresent 20 per cent to 50 per cent of the bond issue sizesubject to the PCE provided by any single bank not exceeding20 per cent of the bond issue size and the extant exposurelimits," the RBI said. RBI has constituted a working group to review theguidelines for hedging of commodity price risks by residentinvestors in the overseas markets. (MORE) PTI AA BEN RSYABKRDS