Skip to main content

RBI monetary policy review: States may need to get their loans rated

RBI monetary policy review: States may need to get their loans rated
If the state development loans (SDL) are rated, the margin requirement would be set at 1 per cent lower than other SDLs for the same maturity buckets

In its June monetary policy, the Reserve Bank of India (RBI) reduced the margin requirement for government securities (Gsecs) and state development loans (SDL) mortgaged by banks to access liquidity from the central bank. The central bank said the margin requirement for government bonds would be in the range of 0.5 per cent to 4 per cent, depending on residual maturity. For SDLs, the margin requirement would be 2.5 per cent to 6 per cent.

The rule was to have a margin requirement of 4 per cent for Gsecs and 6 per cent for SDLs. Furthermore, if the SDL is rated, the margin requirement would be set at 1 per cent lower than other SDLs for the same maturity buckets.The segmentation would help differentiate the market risk across securities, the RBI said. The RBI had earlier said it planned to let the SDLs be valued by finances of a state government. But now, the central bank said the relaxations in margin requirement would incentivise the state governments to get a public rating for SDLs.

In a bid to make the SDLs more market-oriented, the RBI said they should be valued at the price at which they have been traded in the market.In case of non-traded state government securities, the valuation will be based on the state-specific weighted average spread over the yield of the central government securities of equivalent maturity, as observed at primary auctions, the RBI said. Besides, state governments can now have special drawing facility at repo rate minus 200 basis points, against repo rate minus 100 basis points earlier. The states maintain two funds with the RBI to repay their obligations at the time of maturity of their bonds. The rate cut will incentivise states to use the funds, even more, RBI said.
 
The central bank also asked banks to spread their first quarter valuation losses in the bond portfolio over four years. It had allowed doing so in the past two quarters too, but most banks had decided to take a hit in the quarter itself. In an important move, the central bank allowed more participants to short-sell Gsecs. Currently, only banks, primary dealers and certain well-managed Urban Cooperative Banks (UCBs) are permitted to undertake the short sale of transactions. Besides, there are various limits on shorting. “With an objective to add depth to the Gsecs and repo markets, there is a proposal to liberalise the eligible short sale participants’ base as well as relax the entity-wise and security category-wise limits for short selling in Gsecs,” the RBI said.

The central bank also allowed primary dealers limited access to foreign exchange related transactions in order to help their foreign portfolio investor clients. Moreover, the central bank said it will enforce a regulation that will help curtail abusive market practices. Currently, foreign exchange and fixed income investors abide by the code of conducts formulated by their own associations. The central bank wants to introduce regulations, “in line with the best global practices to prevent abuse in the markets regulated by the RBI.”

Margin Requirement
  • The central bank said the margin requirement for government bonds would be in the range of 0.5% to 4%, depending on residual maturity
  • For SDLs, the margin requirement would be 2.5-6%
  • The rule was to have a margin requirement of 4 % for G-secs and 6% for SDLs
  • If the SDL is rated, the margin requirement would be set at 1 per cent lower than other SDLs for the same maturity buckets
  • The segmentations would help differentiate the market risk across securities, the RBI said
The Business Standard, New Delhi, 07th June 2018

Comments

Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…