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Tuesday, Oct 22, 2002

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Banks likely to be freed of statutory requirements — Collateralised borrowing and lending obligation

Poornima Mohandas

MUMBAI, Oct. 21

THE Reserve Bank of India is considering a proposal to exempt banks from meeting SLR and CRR requirements for their borrowings through the Clearing Corporation of India (CCIL)'s new money market trading platform.

This follows recommendations made by CCIL, based on the feedback obtained from market participants on the new trading platform - Collateralised Borrowing and Lending Obligation (CBLO).

CCIL has suggested that these statutory requirements on CBLO borrowings be lifted.

CBLO, currently in the mock trading phase, is an instrument devised by CCIL to meet the lending and borrowing requirements of banks, financial institutions, primary dealers and mutual funds.

Through this new and `secured' system, a borrower can pledge government securities with CCIL and obtain funds in exchange for tenors varying from one day to as much as three months.

The lender of funds obtains CBLOs in demat form which can be freely traded in the market.

Many banks do not seem keen on the new product because of the existing statutory requirements (SLR and CRR) to be fulfilled for all CBLO borrowings for tenors below 15 days.

As of now, borrowings under CBLO are being treated like call money borrowings even though the former is a secured form of lending and the latter unsecured. Repo market transactions, a secured form of borrowing, do not require banks to fulfil either SLR or CRR requirements.

`What is the advantage of this instrument?' ask many banks which seem rather flustered with the new instrument.

According to a debt market analyst, if the statutory norms were to remain, it would be a `sure dampener' on this instrument.

However, with the lifting of these norms, the market would likely receive this product well, he said.

"Through this instrument counter-party risk and limits can almost be overlooked, since transactions are guaranteed by CCIL. This should also help develop a short-term yield curve,'' he said.

Primary dealers, who are perennially on the hunt for funds, especially following the new lending and borrowing limits in the call money market, are upbeat on the new product.

According to CCIL, CBLO will provide a more transparent screen-based trading platform, with anonymity for borrowers and lenders.

As advantages, CCIL officials enumerate that a market participant is not locked into his tenor in this market like in a repo deal. In the case of CBLO, the lender can trade in the issued CBLOs, plus enjoy the merit of `substitution' of pledged securities, unlike in repo deals.

CCIL claims that it has installed the required software in over 45 organisations. A CCIL official said "40-50 trades are taking place daily in the mock trading environment.''

CCIL officials said the formal launch of the product would be after the ormulation of prudential norms by the central bank. The product should be out in the market by next month.

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