Corporate borrowing costs see greater fall than home loans: RBI

With banks turning stingy in passing on RBI's rate cuts to consumers, rate of home loans has fallen by only 0.26 percentage point since 2015, but corporates have managed to bring down their borrowing cost by 1.44 percentage point by tapping bond markets, as per the central bank.

With banks turning stingy in passing on RBI's rate cuts to consumers, rate of home loans has fallen by only 0.26 percentage point since 2015, but corporates have managed to bring down their borrowing cost by 1.44 percentage point by tapping bond markets, as per the central bank. Between January 15, 2015 and April 5, 2016, Reserve Bank reduced the repo rate by 150 basis points, but in response to this, the banks have lowered their benchmark lending rates by only 60 basis points, according to Reserve Bank's annual report for 2015-16.

Between December 2014 and June 2016, home loans dropped by just 0.26 per cent to 10.76 per cent in June 2016 from 10.50 per cent in December 2014.

During the same period, corporates' borrowing became cheaper by 144 basis points.

Corporates' borrowing from shortest maturity commercial papers dipped to 6.54 per cent in June 2016 from 7.98 per cent during December 2014.

Corporates are borrowing at a cheaper rate through issuance of commercial papers, RBI said, while adding that there was a surge in public issuances of corporate bonds in the fiscal year 2015-16.

In the second half of the year, following the September reduction in the policy repo rate and again towards the close of the year, yields of top-rated AAA corporate bonds eased, following g-secs (government securities) yields.

The corporate bond yields also declined following easing of g-secs yields during 2016-17 so far (up to August 2016).

"Taking advantage of low yields vis-a-vis bank lending rates, corporates raised more resources from the bond market in recent period," RBI stated.

According to RBI, banks are not passing on the benefits of rate cuts to customers to protect their earnings.

So far in the financial year 2016-17, there has hardly been any transmission of a reduction in the policy rate to the actual lending rates charged to customers, stated the report.

RBI said banks might have been loading a higher credit risk premia on their new customers in order to attain their desired return on net worth in a rising NPA environment.

Lenders are also charging a higher strategic risk premia on their riskier loans as part of their business strategy to reorient their lending operations towards less risky activities, it said.

Increasing bad loans, fall in their recovery a problem for banks: RBI

The problem of bad loans for the Banking sector is significant when one looks at the increase in stressed assets and the falling recovery of bad loans, said a senior Reserve Bank Of India (RBI) official on Tuesday.

Any bank that does not have a strong risk management system will have a highly susceptible credit portfolio, said RBI Deputy Governor N.S.Vishwanathan at the inauguration of the national conference on 'Risk Management-Key to Asset Quality,' organised by The Associated Chambers of Commerce and Industry of India (Assocham).

"The total stressed assets of public sector banks have risen to 14.5 per cent as at the end March 2016. They still contain some element of restructured assets indicating potential for some more pain, albeit of lesser intensity.

"With the annual recovery in NPAs (non-performing assets) falling from 20 per cent in 2013-14 to nine per cent in 2015-16, the problem assumes greater significance," he added.

According to Vishwanathan, there may not be big addition to NPA in the coming period as it would moderate but the provisioning needs as the NPAs age will put pressure on a bank's profit and loss account.

Noting risk management is not static and evolves over a period of time, he said risk management sophistication grows with the growth in the complexities of a bank's functioning.

Vishwanathan said the government has notified the amendment to the Debt Recovery Tribunal Act and SARFAESI Act which will speed up the debt recovery process, while the RBI has issued guidelines to make large borrowers to go to capital market for part of their funding needs

RBI measures need more heft to help corporate bonds

Steps such as granting more freedom to insurers and retirement funds to buy securities are needed, say investors

 The central bank’s latest measures to deepen the corporate bond market may not be enough and may require more steps including granting more freedom to insurers and retirement funds to buy the securities, investors say.

On Thursday, the Reserve Bank of India (RBI) announced a set of measures to encourage companies to borrow from the bond market, allowed lenders more freedom to give credit enhancements to lower-rated issuers, permitted foreign investors to trade directly in bonds and introduced a repurchase facility for corporate bonds. 

While these measures will have a positive effect on turnover and transparency in pricing for corporate bonds, more steps may need to be taken to deepen the market to the desired level, bond market participants said.

“There is no magic wand for the bond market and things cannot happen overnight. This is a start and many more steps are required,” said Ananth Narayan, regional head of financial markets for South Asia and Asean (Association of Southeast Asian Nations) at Standard Chartered Bank. 

For instance, RBI’s rule to make bank loans expensive for so-called specified borrowers will prod these companies to meet their funding requirements through corporate bonds. Specified borrowers are companies that have aggregate sanctioned credit limit of more than Rs.25,000 crore from banks in fiscal 2018. But to soak up this extra supply of bonds, the current set of investors may prove inadequate. 

What is required to create demand for this supply is allowing insurance companies and provident funds more leeway to buy bonds. 

“The rules of the other regulators (such as insurance, pension, provident fund) have not changed. What is required is the enhancement of buying power of the likes of Life Insurance Corp. of India and Employees Provident Fund Organization,” said a banker, requesting anonymity. 

Insurance firms, provident and pension funds are barred from buying bonds rated below AA. Also, the aggregate investment of these entities is also limited by respective regulations. 

RBI has, however, allowed banks more freedom in giving partial credit enhancements, a step that will help improve the rating of corporate papers of these companies and consequently improve their ability to access the bond market. Bond traders believe this is one of the most effective measures announced by RBI. 

Credit enhancement is essentially a way to improve the credit rating of a bond issue. This is done by structuring the bond sale in such a way that the bank provides a source of assurance or guarantee to service the bond. 

“The easing of partial credit enhancement for banks is a positive and will help low-rated companies to access the market easily. Of course, there is a price element to it,” said Sujata Guhathakurta, head of debt capital markets at Kotak Mahindra Bank. 

However, RBI still stipulates that a single bank cannot give credit enhancement of more than 20% of the issue size and enhancement of up to 50% of the issue size can be given by the entire banking system. 

Bond market participants have long complained about a narrow investor base, especially for low-rated bonds. With more freedom to give credit enhancements, banks will help such issuers get investment interest from long-term investors such as insurance companies and provident funds. 

In fiscal 2016, firms raised a record Rs.4.6 trillion by privately placing bonds, according to data from the Securities and Exchange Board of India. Fund raising by bonds has been rising every year since fiscal 2014. 

Another measure by RBI which aims to make it easier for banks to raise capital by issuing Tier-I and Tier-II bonds to overseas investors may not benefit banks that are in dire need of funds.

Moody’s Investors Service said in a note dated 26 August that although this opens up an alternate funding route for banks, overseas investors will be reluctant to buy Tier-I bonds given the lack of liquidity of these papers in the domestic market. 

“Banks’ capital requirements are large with the masala route providing an alternative. That said, these bonds are not an end in itself. Credit-challenged banks will find it difficult to raise funds through masala bonds,” said Amrish Baliga, head of structured origination at Deutsche Bank’s India unit. 

In a nutshell, the measures ease the fund-raising process for many companies and even banks, but not for all of them. The biggest measure is still awaited: RBI accepting corporate bonds as collateral in its liquidity operations. In its Thursday release, RBI said it was “actively considering” it.

UPI just turned your phone into a bank

Customers of 21 banks can soon use Unified Payments Interface app to send/get money

In a push to a cash-less economy, National Payments Corporation of India’s Unified Payments Interface is ready and customers of 21 banks will in a day or two be able to send and collect money via a smartphone.

A brainchild of RBI Governor Raghuram Rajan, the UPI, which works on single click two-factor authentication, will allow a customer to have multiple virtual addresses for accounts in various banks. The UPI app of 19 banks will be available on Google Play Store in two-three working days for download. The details of the service will be available on the websites of the 21 banks. The new payments interface will also provide an option for scheduling push and pull transactions, such as sharing bills among peers.

One can use the UPI app instead of paying cash on receiving a product from an online shopping website and also for naking miscellaneous payments such as utility bills, school fees and over-the-counter/barcode-based payments. To ensure privacy of customer data, NPCI said, in a statement, that there is no account number mapper anywhere other than the customer’s own bank. This means customers can freely share their financial address. A customer can also use the mobile number as the user-name instead of a virtual address like “1234567890@xyz”.

AP Hota, MD and CEO, NPCI, said: “This is a success of enormous significance. Real-time sending and receiving money through a mobile application at such a scale on interoperable basis had not been attempted anywhere else in the world.”

After assessing the pilot run, the RBI had accorded final approval for public launch of the product. NPCI had decided that only banks with a thousand pilot customers, 5,000 transactions and success rate of around 80 per cent would be permitted to go live. Such a threshold criteria helped banks to refine their systems and procedures.

Banks on the bandwagon

Arun Tiwari, Chairman and Managing Director, Union Bank of India, said: “...Union Bank in association with NPCI is one of the first public sector banks to launch this (UPI) product. This mobile app can be used by both our bank’s customers and non-customers.”

What monetary transmission means: Abheek Barua

Reducing policy rates is not enough. The key is to ensure banks lend to credit- constrained borrowers

If there is a single blot on the otherwise unblemished track record of Reserve Bank of India ( RBI) Governor Raghuram Rajan, it would be his inability to ensure smooth “ transmission” of RBI’s policy signals to actual lending rates in the economy. While the central bank has lowered the signal repo rate by one- and- a- half percentage points, banks have reduced lending rates by less. It is perhaps legitimate for the governor to claim that he is hardly to blame for this, that he has done his bit and the ball has always been in banks’ courts. However, the effectiveness of monetary policy is ultimately about RBI’s actions translating into reduced EMI’s on mortgages and car loans, lower credit card rates, cheaper working capital and so on. Thus, transmission of RBI policy is agauge of how well monetary policy as a whole has worked in stimulating the economy. If it hasn’t quite done the trick, the central bank must take some responsibility for it.

Mr Rajan’s predicament was partly because of the monetary policy regime that he inherited. Around 2010 when D Subbarao was at the helm, RBI decided to change the monetary regime it operated in. Previously, the central bank allowed episodes in which banks were short of liquidity ( thus, borrowing from RBI through its repo window) and those in which they were surplus ( parking surplus funds with RBI at the reverse repo rate). The new regime was one in which they there would be a “ permanent” or “ structural” liquidity deficit of roughly one per cent of banks’ deposits, ensuring that banks would always be net borrowers at the central banks refinance window.

This shift in regime, coupled with the fact that the actual liquidity deficit often exceeded the target, introduced an element of uncertainty about their fund position that kept bankers on edge. Thus, it wasn’t surprising that banks wanted to ensure that they had enough deposits to fall back on. Deposit rates remained sticky. Banks run on commercial principles and attempt to maximise the margin between lending and deposit rates. In the absence of significant deposit rate reductions, lending rates did not change much.

                                   Abheek Barua

Mr Rajan finally addressed this problem in the April 2016 monetary policy by reverting to the old regime, and committing to maintain aneutral liquidity regime. This meant plugging the “ structural” deficit by infusing liquidity both through bond purchases ( buying bonds from the market and offering cash in exchange) or by buying dollars in exchange for freshly minted rupees. Critics would claim that RBI could have done this much earlier to give the economy a helping hand instead of laying the blame on banks’ shoulders. A more charitable view is that a major systemic change of this sort takes time, especially with inflationary pressures ( traditionally associated with high liquidity) looming in the background.

Even if banks were to fall in line in this new regime, that might not be the end of RBI’s problems. A recent paper by Johannes Stroebel and three of his colleagues (‘ Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession’, August 2015, New York University Working Paper) points out that transmission is likely to boost the economy only if banks pass on the benefits of monetary or credit expansion by the central bank (like a cut in the policy rate) to credit- constrained borrowers, those with ahigh marginal propensity to borrow. These borrowers, freed from their credit constraints are likely to spend more. Increasing the supply of credit to those who already have ample funds does not give the economy a cyclical boost. Trying to lend to borrowers who already have enough cash is somewhat pointless — if they wanted to spend more, they would have already done so.

Mr Stroebel and his colleagues examine the impact of a reduction in the cost of funds for 8.5 million credit card holders in the US between 2008 and 2014. They find that banks were least willing to increase credit limits for those who wanted to borrow the most, and most eager to lend to those who were not interested in borrowing at all. This apparently strange pattern has a simple explanation — the marginal propensity to borrow is inversely related to the risk- score (FICO scores) of borrowers. Credit constrained borrowers are the riskiest and while they provide a ready market for loans, high default rates actually erode banks’ profitability.

Mr Stroebel and his colleagues claim that this disconnect between the marginal propensity to borrow and the marginal propensity to lend of banks is why the attempt to expand credit, or more generally monetary policy, has not been effective in fighting the recession in the US that followed the great financial crisis. Their work does not have lessons only for the American credit card market or the US economy. The findings have implications for all credit markets, both retail and corporate. I would find it particularly relevant for India. With default rates and stressed loans already high in the system, banks would be perfectly justified (as a rational business decision) not to lend to those firms that are strapped for credit, desperate to borrow but likely to find it difficult to service loans. Going by RBI data, there has been a noticeable drop in credit disbursed to small and medium enterprises over the past few months. While some of this could be explained by the lack of demand for funds, banks’ reluctance to lend has also been a factor.

Monetary transmission in the sense of getting policy rate cuts to actually impact on the economy is not just about persuading banks to lower their benchmark lending rate in tandem with policy rates. They might just comply now that RBI is willing to keep liquidity neutral; whether they will actually lend to the ‘ right’ borrowers in the current economic environment is another story. Mr Stroebel’s paper shows that India will not be alone in finding out that monetary policy is somewhat weak in propping up a sagging economy. Fiscal policy, anyone?

RBI clears decks for universal banking

Issues new norms for ‘on-tap’ licensing; large industrial houses barred

The Reserve Bank of India on Monday unveiled guidelines for ‘on-tap’ licensing of new private banks, opening the door for entities such as Edelweiss Financial Services, JM Financial, LIC Housing Finance, Magma Fincorp, Muthoot Finance, Shriram Capital and UAE Exchange & Financial Services, which had missed the bus in the last round, to float universal banks.

The guidelines in respect of promoter eligibility, corporate structure, foreign shareholding, dilution of promoter group shareholding and listing on the stock exchanges appear liberal as compared to the 2013 guidelines under which IDFC Ltd and Bandhan Financial Services were allowed to set up banks.

Under the new guidelines, resident individuals and professionals with 10 years’ experience in banking and finance are eligible to promote universal banks. Previously, only entities/groups in the private sector, entities in the public sector and non-banking financial companies (NBFCs) were eligible.

Large industrial houses are excluded as eligible entities, but can invest in the (universal) banks up to 10 per cent. A universal bank is a bank offering retail, wholesale and investment banking services under one roof.

Under the new guidelines, a Non-Operative Financial Holding Company (NOFHC) is not mandatory for setting up a bank in case the promoters are individuals or stand-alone promoting/converting entities who/which do not have other group entities.

The RBI has said that in case a bank is to be set up through an NOFHC, a promoter/promoter group should hold not less than 51 per cent of the total paid-up equity capital in the holding company. Earlier, entities/groups had to set up a bank through a wholly owned NOFHC.

Entities/groups in the private sector that are ‘owned and controlled by residents’ and have a track record of at least 10 years, are eligible as promoters. If such entity/group has total assets of ₹5,000 crore or more, the non-financial business of the group should not account for 40 per cent or more in terms of total assets/gross income.

Existing NBFCs ‘controlled by residents’ with a track record of at least 10 years are also eligible as promoters. However, any NBFC, which is a part of the group that has total assets of ₹5,000 crore or more and where the non-financial business accounts for 40 per cent or more is not eligible.

Paid-up capital

The initial minimum paid-up voting equity capital has been left unchanged at ₹500 crore. However, thereafter, the bank must have a minimum net worth of ₹500 crore at all times.

The criteria requiring promoter/s and the promoter group / NOFHC to hold at least 40 per cent of the paid-up voting equity capital, which will be locked-in for five years from commencement of business, remains unchanged. The promoter group shareholding will need to be brought down to 15 per cent within 15 years (from 12 years earlier).

The (universal) bank has to get its shares listed on the stock exchanges within six years (from three years earlier) of the commencement of business.

The current aggregate foreign investment limit is 74 per cent will apply to universal banks. Under the earlier regime, the aggregate non-resident shareholding could not exceed 49 per cent for the first five years.

George Antony, Managing Director, UAE Exchange India, said: “…The final call on application for the universal banking licence will be decided post the board meeting to be convened shortly.”

Inter-bank squabbles delay NPA resolution

There is discontent about larger banks striking bilateral deals with promoters of firms with stressed assets

While the Reserve Bank of India does not prohibit a bank from conducting bilateral dealings with a borrower, it doesn’t seem to have foreseen private deals struck outside the joint lenders’ forum. Photo: Aniruddha Chowdhury/Mint

Cracks in the joint lenders’ forum (JLF) experiment, aimed at timely resolution of stressed loans, are beginning to show and the picture isn’t pretty.

According to at least four people in the know, there is discontent among factions of lenders about larger banks in the forums striking bilateral deals with promoters of firms with stressed assets, making it difficult for JLFs to effectively implement a resolution or recovery procedure.

“In some large cases, larger banks have taken possession of land parcels or other fixed assets, reducing the outstanding debt of the company. This allows them to maintain a standard asset classification on the asset for some time,” said a senior official at a large public sector bank, the first of the four people quoted above. The banker spoke on condition of anonymity as discussions at JLFs are confidential.

These decisions are usually taken outside the JLF in direct discussions with borrowers, said the banker quoted above. What such deals end up doing is reducing the pressure that the JLF would put on an errant borrower and delaying the resolution process further.

Indian banks have gross bad loans of Rs.5.8 trillion, a number which bankers expect to rise.

“The JLF mechanism is a time-bound process; so, any delays in it will only hurt the bankers involved. We have issued a clear mandate that if any such bilateral dealings are discovered from now, they will be reported to the regulator immediately and action will be requested,” he added.

To be sure, the Reserve Bank of India (RBI) does not prohibit a bank from conducting bilateral dealings with a borrower.

In January 2014, the central bank issued norms that require banks to form a JLF as soon as an account delays repayment by over 60 days. The JLF will be organized by the lead lender in a consortium lending case and by the largest lender in cases with multiple lenders. The JLF is then required to come up with a corrective action plan within 30 days and a majority of the lenders are required to sign off on the plan within 30 days.

Delays in decision-making or implementation of the plan are met with accelerated provisioning on the case, according to the regulatory norms.

But RBI doesn’t seem to have foreseen private deals struck outside the JLF.

In April, private sector lender Axis Bank acquired control over Jaypee Group’s headquarters in Noida, in exchange for reducing debt. In the same month, IDBI Bank Ltd and State Bank of India (SBI) were also offered parcels of land to reduce the debt. At the beginning of the year, ICICI Bank, too, had taken over 275 acres from Jaiprakash Associates Ltd and reduced nearly Rs.1,800 crore worth of debt of the company.

Eventually, the promoter was forced to offer an option to other lenders as well to take over unencumbered land. The proposal is still under discussion and yet to be approved, the first person confirmed.

SBI, IDBI Bank, Axis Bank, ICICI Bank and a spokesperson from the Jaypee Group did not respond to e-mails seeking comment.

In the case of Bhushan Steel Ltd, according to a public sector banker who is the second of the people quoted above, most public sector banks had moved to classify the account as a non-performing asset (NPA) in April. However, some of the private sector banks continued with a standard asset classification on the account.

“Divergence in asset classification tends to work against any recovery measures as lenders won’t ever be on the same page. Besides, if a majority of the banks in the consortium have classified the account as NPA, it is unfair that others continue with it as standard,” the second person said.

While it is unclear why some banks continued with a standard asset classification in this case, a probable reason could be some short-term repayments which were received by them, added the second person.

Bhushan Steel has over 40 lenders, most of which are public sector banks. SBI and Punjab National Bank (PNB) are the lead lenders. Calls and text messages to spokesperson for PNB and Bhushan Steel remained unanswered till the time of going to press.

“Some smaller private banks and foreign banks who have small loan exposures in certain cases also break protocol and threaten to file winding-up petitions, even as the JLF process is going on. If lenders are quibbling among themselves, then you cannot force the borrower to do anything,” said the second person.

However, the blame for any delays in JLF proceedings does not just lie upon private sector or foreign lenders. According to a senior official at a large private sector bank, state-owned lenders often have an elaborate and rather slow decision-making process, which makes the JLF resolution very cumbersome.

“There have been cases where smaller state-owned lenders agreed to give additional working capital loans to a borrower and then never sanctioned it because the head office differs from what the banker at the JLF has agreed to. If the borrower cannot run daily operations, it would be unfair to expect them to pay back their dues,” the private sector banker said.

According to RBI’s financial stability report released last month, gross non-performing assets of banks rose to 7.6% of total advances in the March compared with 5.1% in September 2015. The top 100 borrowers accounted for nearly a fifth of these bad loans. A large number of these top borrowers have a JLF looking at possible solutions to ensure recovery.

“These differences among lenders point to the fact that probably the JLF system is not working to the extent that it was meant to. Bankers will have to sit together and resolve their differences themselves. It is likely that the deadlines that were talked about earlier will be stretched further,” said Saswata Guha, Fitch India Services Pvt. Ltd.

In December, RBI governor Raghuram Rajan said that banks would be required to clean up their balance sheets by 31 March 2017. This meant recognizing visibly stressed assets, providing for them and coming up with a resolution plan.

There’s a need to develop corporate debt market: H.R. Khan (Former Deputy Governor of RBI)

H.R. Khan, former deputy governor of RBI, speaks of the need to develop India's corporate bond market and verious steps in how to go about it

H. R. Khan

Let me start where the governor ended his previous monetary policy press interaction; he said that repo in corporate bonds will be allowed and Mr. Khan is going to be in-charge of a committee that will present the roadmap to it. Can you tell us how soon we will be having repo in corporate bond markets? 

 Let me give you a bit of a background about corporate debt market, which we have been talking since ages.

There are structural issues and in fact, not many countries also have very robust corporate debt market and many countries like India have a bank-dominated system but corporate debt market is assuming criticality because there is a risk diversification, it compliments and supplements (what) banks are doing and more particularly in Indian context, it has also assumed importance because given the bank’s position in terms of their non-performing loans (NPLs) and other constraints, there is a need to develop corporate debt market and particularly when we are also planning to see that corporates at an aggregate level, they should not get overexposed to the banking sector part of their financial requirement should go to the market and through the bond market.

So if that is the case, then we need to do what all need to be done to develop corporate debt market.

It was in that context that I thought it was very crucial that RBI is contemplating allowing corporate debt in the repo transactions?

The whole idea is that it would be a major change in terms of— we are only taking sovereign papers so far as the repo is concerned. However, if you see world over, there are central banks whether it is unconventional monetary policy or quantitative easing and all, they have gone for corporate debt paper and expanding their balance sheet.

In RBI, we have been conservative and rightly so because given the illiquidity of corporate bond market and credit risk that may come and probably it may have impact on the balance sheet but we have to move on in the sense that we want to develop the corporate market, we have to do something which will be a game changer.

Is that committee report, which you were leading, ready, submitted?

FSDC has been discussing about this corporate debt market for quite some time. Then about few months ago, the sub-committee of the FSDC decided that let us have a group of all regulators and government to give a list of implementable recommendations, not go for a big report because there have been many reports on this corporate bond market to call out what all can be done and what new things we can do for the corporate debt market. So, we had all the regulators and government we sat together and we have worked out—the job is almost done and it is being submitted. Broadly, we had tried to look at what are the factors, which can further enable development of corporate debt market, which I put it in a characteristic manner in terms of issuer, in terms of investor, in terms of infrastructure, in terms of intermediaries, in terms of instruments and incentive and innovation.

Therefore, from what you are saying, it looks like a repo of corporate bond in RBI’s liquidity adjustment facility (LAF) is only one part. You have many other recommendations?

Yes; many other parts, and all the parts have to play together and in fact, most of the regulators and particularly RBI and Sebi are mostly involved and we have good understanding and quite a few things, implementers and timelines are also being suggested. So, we will see a lot of action in the next couple of months in terms of actual implemention.

So, which other areas? The LAF is one. What are the other things possible?

If I can take you through very quickly for example, on the issuance side, we have not seen much reissuances. And volumes are not there so liquidity is not there. And on corporate side, there is a problem because bunching will be there. So, what we are trying to say that whether you can have same International Securities Identification Number (ISIN) number but different redemption date so you can do it so, National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) will probably work on that. And the other thing is that if you do reissuances, the stamp duty can be removed so that there is an incentive for reissuances.

Similarly, in the case of, for example, investor. We have not allowed foreign portfolio investors to invest. So, now as announced in the budget, now unlisted bonds and PTC they will be allowed to invest. And if you talk of intermediaries, the very critical point is market making. So, what we are looking at is whether some of the brokers can be market makers and if they become market makers, what sort of support they can get. So, they probably will get an access to repo and corporate bond market which is not allowed to them. So, if they get an access through repo to the market repo, probably they can make market. But then exchanges are working out a scheme and I think it is in advanced stage of being implemented.

And the other is in terms of banks, and primary dealers are already trading members. So, they could be also encouraged to become market makers. And if you see the infrastructure side, there are quite a few things. For example, one is electronic book for this private placement. And there is integrated trade repository where both primary and secondary market issuances one place, prices, volume, everything is available.

And one critical element of infrastructure is credit rating agencies who play very important role. So, they will be encouraged to become members of credit information bureaus. So, they can access information. They are eligible users, but many of them are not members. And also possibly, going forward, whether they can be given access to Central Repository of Information on Large Credits (CRILC) data, but that has to be used very carefully, because SMA-2, SMA-2 does not mean that it is full default. So, probably that is one area.

And other critical part is some of the instruments we have introduced, they have not really taken off. Take the example of credit default swap (CDS), repo in corporate bond. For example, in CDS we allowed few things, it does not work. In the corporate debt repo, we have reduced the haircut.

So you will allow more partial re-enhancement?

So, what we are trying to do is in terms of CDS, the main issue which has been a stumbling block as per the market is this netting issue involving public sector because of that capital charge increases. So, we were in dialogue with the government whether we have that amendment to the RBI act, netting and if that is not possible, pending that whether based on legal opinion we got second tracked whether the netting can be allowed. So, that will be a big boost.

And so far as repo is concerned, we would like to have a screen based platform. Some cases where the liquidity can be a central counter-parties (CCP) facility and some where it is not liquid it can be without CCP facility. So, that is one area where we can work for this instrument. And other is of course, tripartite repo but better collateral management. The other issue is very important

So, it can be increased, maybe 30-50%. And also, NBFCs were providing credit enhancement, for them there may not be any limit.

But what is the timetable for all this?

Another very critical point in terms of incentive as I have stated is that corporates’ exposure to the banking system as a whole should come down and part of that, they should go to market. So, that is a work in process and RBI will come out with their own recommendation. And of course, finally, as you mentioned is this LAF eligibility.

The whole idea is that once the market repo, tripartite repo gets some traction, there is some liquidity, probably we can open up this for LAF, but we have to see the legal aspect because RBI act is not very clear in terms of whether we can accept or not accept. That will be examined. My hunch is that pending RBI act amendment, possibly we can do. And very important thing which has happened is this bankruptcy code which is one of the main stumbling blocks. We have now the bankruptcy code in place, but the challenge lies in creating the infrastructure of ports and insolvency professionals.

The most attractive proposal or rather one of the more attractive proposals is allowing corporate bonds to be used in the LAF window. The legal opinion at that time was that the RBI would only take sovereign paper. Is this settled?

I would say it is not settled, but we will be in a position to interpret that it can be taken. Of course there has to be very sound risk management practices in terms of ratings, in terms of haircuts and all that. But if there are ambiguities, better to get the act amended. So that view has to be taken.

Now, I wanted to know the timetable. When can we expect some of these?

Many of the things should happen over the next two months.

So in the current governor’s tenure itself some of it may be implemented?

I suppose so. Some of the things will happen. For example, allowing FPIs to invest in unlisted debt and PTCs can happen anytime. And few things market making and all that SEBI is in advanced stage of doing it. And we are also in dialogue with Pension Fund Regulatory and Development Au t h o r i t y (PFRDA) and insurance companies, they will also slightly relax their norms for investment. And for example, even bonds of banks, so insurance companies and PF bonds, they will probably be investing. So, we are in dialogue with them. So, some of the major recommendations are likely to be implemented sooner than what was expected because the whole idea of this group is to give the recommendation and lay down some time frame.