RBI may push large Indian companies to bond market
The Reserve Bank of India may ask large corporations to raise a certain portion of their funding needs from rupee bonds in a bid to deepen the domestic bond market and reduce India Inc’s dependence on bank loans.
The unprecedented proposal is part of a discussion paper, released last week, on the large exposures of Indian banks to corporate borrowers.
The central bank has sought market feedback on the proposals and has set April 30 as the deadline for responses.
“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.
As things stand, state-owned borrowers dominate the rupee bond market, while top private corporations rarely issue rupee paper and usually borrow either in the offshore bond or the local loan markets.
The RBI also wants corporations to finance core portions of their working capital requirements with bonds of three to five years.
“As working capital loans are generally secured against current assets of the borrowers, banks and corporates may mutually decide the issues of sharing securities/collaterals with the investors of such bonds,” RBI said.
The central bank also wants corporations to tap the commercial paper market so as to overcome bank loan limits.
According to the RBI, among the 1,628 private and non-financial companies it researched during the three financial years from 2010–11 to 2012–2013, only 6.7% of their total borrowings came from the bond markets. These companies borrowed 58.50% of their funds from bank loans.
“Average short-term borrowings from banks form around 28.20% of average total borrowings of such companies,” the RBI noted.
In the same discussion paper, the RBI proposed a framework that caps exposure of an Indian bank to a large corporation at 25% of the bank’s Tier 1 capital.
It also proposed including related entities in that exposure limit based on “economic interdependence criteria”, apart from the direct control criteria under the current standards.
Under existing standards, the exposure of an Indian banks to a large corporate group can go up to 55% of its capital funds (Tier 1 and Tier 2), subject to certain conditions.
The proposed framework will become fully applicable from January 1 2019, though Indian banks have been asked to start reporting these numbers effective tomorrow.
