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Rajalakshmi Menon

The RBI has said that inter-corporate deposits through PDs should be for a minimum period of one week. Also, the aggregate limit on ICD borrowings should not exceed 50 per cent of the net-owned funds of the PD.

MUMBAI, Jan. 25

IN a move largely seen as nudging corporates towards the repo market, the Reserve Bank of India has limited corporate lending to a primary dealer to a minimum of seven days. In addition, primary dealers (PDs) cannot borrow from corporates beyond 50 per cent of their net worth, including free reserves.

In guidelines issued recently, the RBI has said inter-corporate deposits (ICDs) through PDs should be for a minimum period of one week. It has also said that the aggregate limit on ICD borrowings should, in no case, exceed 50 per cent of the net-owned funds of the PD.

Bankers said that with the allocation of a minimum tenor of seven days, the RBI has set "a level playing field.''

Said one banker, "Bankers cannot accept deposits for less than seven days and, hence, PDs too should not be allowed to accept deposits for less than seven days. This is a regulatory arbitrage and when corporates are phased out of the call market, their access to the ICD market should also be limited.''

According to bankers, with this move, the RBI has not only ensured that corporates are pushed towards depositing with banks but have also cut off their access to the one-day market through PDs.

Dealers in the bond market said that with the new guidelines, the entire ICD market routed through PDs may fall apart. "Corporates will now look to parking their surplus funds with a mutual fund or with a bank for seven days,'' said one primary dealer.

He added that PDs that were over-exposed to ICDs would now be forced to bring down their ICD exposure to less than 50 per cent of their net worth.

"There may be some panic selling of non-SLR investments, which could bring down the prices of these corporate bonds and raise yields,'' said one chief dealer in a primary dealership outfit.

The RBI circular said: "In the context of PDs sourcing their funds through ICDs and deploying in non-SLR bonds, it is felt necessary to have guidelines on account of liquidity and credit risk associated with such transactions.'' PDs are exposed to "funding liquidity risk'' arising from any inability to roll-over such liabilities as also "market-liquidity risk'' arising from the relative liquidity of non-SLR bond portfolios.

The RBI has said that for these reasons, ICDs should be raised sparingly and not be used as a continuous source of funds.

PDs have also been prohibited from placing ICDs with other counter parties and ICDs accepted from the parent, promoters and group companies or any other related party, should be on an "arms length basis'' and disclosed in the financial statements as "related party transactions.''

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