RBI pushes large borrowers to rebond market - Times of India

The author has posted comments on this article Reuters | Apr 7, 2015, 04.09AM IST

SINGAPORE: The Reserve Bank of India is to ask large borrowers to issue more bonds in an unprecedented move to deepen the domestic capital markets and address concentration risks in the banking system. The RBI has proposed the measure as part of a discussion paper on rules limiting the exposure of banks to individual borrowers.

If enforced in their current form, the new regulations may require India's large corporations to raise a certain percentage of their funding from rupee bonds, forcing many to change financing strategies. "Large corporate borrowers enjoying term loan limits above a certain threshold from the banking system should necessarily meet a certain minimum extent of their term/project loan requirements from corporate bond market," the RBI said. Historically, India's bigger business groups have enjoyed strong relationships with the country's banks, giving them little incentive to issue domestic bonds.

However, the RBI wants to tighten single-borrower limits to 25% of a bank's Tier-1 capital from 55% of combined T1 and Tier-2 under current rules, according to the discussion paper.

The limits will also be based on "economic interdependence" to the corporate group, an expansion from direct subsidiaries. The proposals will bring Indian regulations in line with Basel III standards and are to be fully applicable from January 1 2019. Banks can reduce exposure to individual borrowers, or increase their eligible capital base, or both. Market feedback on the proposals is due on April 30.

In tandem with the single-borrower limits, the RBI is promoting the use of rupee bonds and commercial paper as alternative sources of funding. Requiring companies to sell bonds will add more liquidity to the country's shallow domestic bond market and lighten India Inc's dependence on bank loans.