RBI takes measures to revive corporate bond and CDS markets

Moneycontrol Bureau

The Reserve Bank of India (RBI) on Monday added a few more investors friendly measures to revive the corporate debt market in India. The central bank allowed three more instruments including commercial papers (CPs), certificate of deposits (CDs) and non-convertible debentures (NCDs) of less than one year; to qualify as collateral for undertaking repo auction route in corporate bond market.

This means, the existing holders of those securities can now raise funds through repo auction by pledging the securities.

At the same time, investors can also take listed (say in NSE or BSE) corporate debt securities of original maturity of more than one year but rated as 'AA' or above; to mop up overnight funds through repo auction.

Corporates issue CPs to be subscribed by financial institutions like banks, mutual funds and insurance companies. CDs are generally issued by banks. Repo is the rate at which banks borrow funds from RBI at 8% per annum. So far, banks avail this option using their excess government bond holdings as collater. Now, RBI has extended the reach by including further instruments as collateral.

Moreover, RBI also reduced the minimum haircut in different rated corporate debt securities. For AAA rated paper, it decreased the haircut from 10% to 7.5%. This means, if a bank provides collateral worth Rs 100 crore, RBI will lend it Rs 92.5 crore under repo borrowing window.

For AA+ rated paper, RBI made it to 8.5% as against 12% earlier and it is 10% for AA rating compared with 15% previously.

"Those measures will help bringing in liquidity in the system. Even mutual funds and insurance companies too can benefit out of it. At the time of sudden redemption pressure, fund houses can borrow money from repo window to get rid of any crisis for funds," a head of finance from a leading finance company told moneycontrol.comon condition of anonymity.

In corporate bond secondary market, the average daily trading volume comes around Rs 3000-3500 crore. This is way below than China or US. To infuse more liquidity into the system that grows through credit expansion, many believe, corporate bond market is essential.

Meanwhile, RBI permitted the use of credit default Swaps (CDS) on unlisted but rated corporate bonds in addition to listed corporate bonds. Moreover, one can now apply CDS on CPs and CDs with original maturity up to one year, as well as NCDs with less than one year.

CDS is a kind of guarantee that a buyer of a portfolio provides at the cost of a fee. It is seen as a protection against any big credit default. For example, in anticipation of defaults a holder of 10 corporate bonds sells it to other institutional investors. This will mitigate the risk of the former. However, the later will charge a fee for it as he takes the guarantee to repay the bond liability.

Experts believe, the measures will help mature the CDR market in India, which is still at the nascent stage. CDS is considered as a hedge against credit risk. Banks, mutual funds, FIIs, corporates and primary dealers are the participants in the market.

saikat.das@network18online.com